Pension plans are slowly becoming a thing of the past. If you’re looking for good investments which have tax advantages, think about the 401k. 401k comes from the IRS retirement account that goes by the same number and here’s a beginners guide to manage 401k investments.
Choose how much you want to set aside each month for your 401k investment. Ideally, it should be at least 10% of what you make, but the more you can save, the better it is for you. Remember, it is for a time when you can actually sit back and relax, so don’t be unhappy if you’ve had to give up a holiday for the 401k. If you don’t want to think about this, set up an automatic fund transfer and forget about it.
Remember you want your investments to grow tax free. The 401k is offered by private businesses and one of its biggest benefits is the tax benefit. This of it as a retirement account where the company you work for, deducts an amount from your paycheck as an investment in your 401k account. This money is not taxed till you make a withdrawal when you retire, which is good news indeed. Your money grows but you’re not taxed for it till much later.
Choose your investments carefully. Your company will be able to help you out here, bringing in expert advice or investment options for you to consider. You might not have a lot to choose from, but mutual funds will most likely be on the menu. Do your homework before you choose where you want to put your 401k.
See what your company has to offer. Companies offer their own money for every little amount you contribute. The company contribution for a $1, for instance could be anywhere between 50 cents to a dollar. So do see what the company policy is and then decide how you want to proceed, both in terms of what you want to contribute and where you want to invest.
The 401kinvestment plan is ready for withdrawal when you’re a few months shy of sixty or if you’ve let your place of work at the age of 55. Any time before, and you could attract a 10% penalty apart from the income tax you’ll have to pay. So bide your time, be patient and wait for your money to grow.
But you can still make the 401k work for you- take a loan on the amount you’ve invested in the 401k. You will need to follow company policy on this but you should be able to borrow about half of the money you’ve put in and have about five years to pay it all back. In the case of an emergency, this may seem like a tempting idea, but if you can, hold off on the borrowing as well.
What happens if you quit this job? You have an option of taking your 401k and rolling it over, tax free, to an IRA rollover, a retirement account. There are many ways to plan for a rainy day and the 401k is one of the best ways to do so.
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