Your first 401(k): A beginner’s guide to saving for retirement

Just like paying your credit card bill on time and in full every month, building your retirement savings is an important investment in your financial health. 

There are many different ways to save for retirement. A 401(k) plan is one of the easiest. Here’s what you need to know to get started.

What is a 401(k) plan?

A 401(k) is a type of retirement savings plan sponsored by your employer. 

If my employer offers a 401(k), do I want to sign up for one?

Almost certainly yes. 401(k)s are great for several reasons:

1. They’re convenient. Once you set up your 401(k), a portion of your paycheck will be transferred automatically to your retirement account every month.

2. They’re tax-advantaged. There are two kinds of 401(k). Each offers a different benefit when it comes to taxes:

  • Traditional 401(k): comes out of your gross pay before taxes, so you won’t pay taxes until you retire.

  • Roth 401(k): contributions come out of your paycheck after taxes are taken out. That means that when you retire all of your withdrawals are tax-free.

Good to know: you can do both. If you contribute to a 401(k) plan at work, you can still open a Roth IRA.

3. Many employers offer matching funds. If that’s the case with your employer, as long as you make contributions to your 401(k), you’ll be getting a free retirement savings boost as well.

When should I sign up for a 401(k)?

As soon as possible. When it comes to saving for retirement, time is your best friend.

How much should I contribute?

Always err on the side of contributing more. There are limits to how much you can contribute to a 401(k), and then tend to change from year to year.  Make it a goal to contribute as much as you can, up to the allowable limit*, every year.

A few things to keep in mind:

  • Every time you get a raise or bonus, increase the contribution you make to save even more.

  • If your employer offers to match your 401(k) contribution, be sure to contribute at least enough to get the full match offered by your employer. For example, if your employer offers to match your contribution up to 3% of your salary, be sure to contribute at least 3%. Not taking full advantage of an employer match is like throwing away free money!

What happens to my 401(k) if I lose/change jobs?

If you change jobs, there are a few options:

  • You may be able to leave your account where it is. 

  • You can rollover your plan into your new employer’s 401(k) plan.

  • Or you can rollover your retirement plan into an individual retirement account (IRA). 

What happens if I withdraw funds before retirement?

During an emergency, you might be tempted to reach into your retirement fund before you are ready to retire. However, this is rarely a good idea: 

  • You will permanently shrink your retirement savings and you won’t be allowed to put the money back into the account afterward. 

  • You will have to pay a 10% penalty fee if you withdraw funds before the age of 59 ½. 

  • Early withdrawals from your 401(k) are subject to income taxes.  

Instead of dipping into your 401(k), prepare for unexpected expenses by building an emergency fund.

I need to withdraw funds from my 401(k) due to COVID-19. 

Under the CARES Act, it’s easier for those affected by the pandemic to access their retirement funds. Here’s the run-down:

  • Individuals affected by the outbreak can withdraw up to $100,000 from their 401(k).

  • The 10% penalty fee will be waived. 

  • If you, a spouse, or your child have been diagnosed with and/or affected by COVID-19, you qualify for these benefits. 

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