401 (Que)?

Saving money is hard, especially when your fresh out of school *cough, cough* or a decade out of school *cough, cough*. Not only are you probably stuck ‘paying your dues’ with an entry-level job but being a grown up is quite honestly just plain expensive. The list of things you need to be paying on a monthly basis alone canquickly tally up and consume almost all of that entry-level salary.

Saving money though isn’t about simply putting cash into your piggy bank and calling it a day. Saving appropriately involves a whole slew of other factors, that unless you were a finance major in college you may not have exposure to. However, not having exposure to these things is not a good excuse for not saving. It’s highly important that you start saving money for not just retirement but also for unforeseen circumstance and ‘treat yo self’ emergencies, because let’s face it avocado toast and Kendra Scott are not going to pay for themselves.

There are plenty of ways to actually start saving some of your hard-earned cash and most of them can be in small ways. While everyone’s situation is slightly difference, there are tons of small ways to start saving some money. Enter what we call a 401K.

So what exactly is a 401(k)? According to Investopedia, “A 401(k) plan is a qualified employer-sponsored retirement plan that eligible employees may make salary-deferral contributions to on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings in a 401(k) plan accrue on a tax-deferred basis.

That all made total sense right?

In a nutshell, a 401(k) is offered by employers to help employees (YOU!) save for retirement. Meaning once you get paid whatever amount you have deemed going to your 401(k) account, will but automatically withdrawn from you paycheck and put into your retirement account. While not all companies offer these as a benefit, most who do offer it will also generally match what you put into the account up to a certain percent. There are different ways companies can match what you invest into a 401(k) as well. One of the more common ways are by doing a dollar for dollar match or a 50 cent’s to dollar match up to a certain amount, of course.

So let’s take the dollar for dollar example for a spin. Say I make $1,000 per pay period before tax and I elect to have 5% put into my 401(k). Pretax, 5% of $1,000 is $50 dollars a pay period that is automatically being placed into a savings account. Now with this example say my company offers a 2% match. Since I’ve obviously investing more than 2%,  I’m not just putting $50 a pay period into savings, I’m actually putting $70 per pay period away (50 + 20 = 70). Which might not seem lot a whole lot but if you consider you get paid bi-weekly, there are 26 pay periods in a year, and you do this for say 30 years at the same rate; you’ve actual saved $54,600 without even considering any interest you might have been accrued in those 30 years. That’s $5 a day that your saving and roughly an additional $2 per day that your company is paying you, just because you’ve decided to save for your retirement. That’s sounds like ‘free money’ to me.

Now I know that not all companies view their employee’s retirement as a priority so your company may only match you 1% or not even offer a 401(k) but I have also seen companies offer up to 10% dollar for dollar which is amazing, and something you really need to take into consideration when viewing job offers.

I know this all sounds pretty awesome, so what’s the caveat to these savings accounts, huh?  Well I’m glad you asked, because while they may not have ‘bad limitations’ per say there are things you need to consider in order to make sure you’re contributing the right amount for you.

  1. Not all 401(k) plans are created equal. There are actually two types of 401(k) plans: a Roth 401(k) and a tradition 401(k). In a traditional plan, money is withdrawn from your pay pre-tax and is subject to the regular income tax rate at the time of retirement withdrawal, whatever that rate may be at the time. They also face an additional 10% tax penalty if cashed out before the age of retirement. A Roth plan on the other hand taxes your paycheck first and then withdraws the percentage you elected to have saved and unlike a traditional 401(k) they are not taxed at the time of withdrawal.
  2. They are not considered to be liquidable assets or funds that you can quickly cash any time, say for an emergency. The age of retirement is considered to be at 59 and a half years of age. Meaning that when you withdraw from your 401(k) prior to turning 59.5 years old, your withdrawal will be subjected to an additional penalty tax which is usually around 10%, aka the government takes more of your cash. For example if you take out $10,000 for a down payment on a house at the age of 35, $1,000 of that is going straight to penalty taxes plus whatever the going tax rate is for the initial withdrawal. So unless you’re in absolutely desperate, it’s probably not a smart choice to withdraw money before the retirement age.
  3. In essence 401(k) plans are just savings accounts you can’t touch (until 59.5 years old). Usually they’re hosted with a company that actually offers you   plenty of options to invest that money further. The options depend on the employer and the company managing the fund of course, but most often include a diverse array of 10 – 20 investment funds covering a wide range of low and high risk stocks. While most plans will automatically invest your funds into certain stocks, you do have the opportunity to pick your own funds available through said company. If you choose to pick your own funds you need to make sure to do enough research to make an educated decision, or you could end up hurting your future investments.
  4. You have to be eligible for a 401(k). This simply means that most companies require you be a full time employee and to have a certain amount of tenure at that company before you even get the option to sign up for a 401(k). Some companies might offer you eligabliity right when you start working, but more often than not you’ll have to wait a minmiumn of 6 months to a year to become eligibale.
  5. Never assume you’re automatically enrolled into a 401(k). For the most part your company will not automatically sign you up for a 401(k). They may say your eligible and send you a bunch of write ups on what the requirements and benefits are of the a 401(k) but it is up to you to make sure you sign up and start investing! Never assume you’re just enrolled, it’s always best practice to double check.

Overall, 401(k)s are a great way to help save for your dream retirement. I’m talking a year long cruise baby! But you do need to be realistic and aware when it comes to these plans. You need to make sure you understand the plan being offered by your company and if you don’t you can generally contact the company hosting your 401(k) plan or even contact HR in your company to get someone to walk you through the basics. I know it can seem daunting at times and that even $50 a pay period can seem like a tonnn of money, but a 401(k) is all about investing in your future. If $50 a pay period is to much, try starting with a smaller amount and boasting the amount up just a smig each time you get a pay increase. Anyting is better than nothing. And to be quite honest, if you’re not investing in yourself, your lacking a basic method of self-care, which is planning for you future.

Happy Investing!

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