Have you ever reviewed your work benefits and skipped sections like 401(k) that seem confusing? Or ignored it because you felt like “present you” could use the money more than “future you?” If so, you’re not alone! In this article, we’ll help break down what a 401(k) is and highlight some key points that could change the way you think about it as you plan for your future.
What is a 401(k)?
Saving for retirement looks different for everyone, but a popular avenue people take is utilizing a 401(k) plan. A 401(k) is an employer-sponsored retirement savings plan that lets you invest a portion of each paycheck. Benefits include the following:
Tax benefits
Contributions to a traditional 401(k) plan are made with pre-tax dollars, which means your taxable income for the year decreases. Additionally, the investment earnings within the 401(k) plan will grow tax-deferred until you decide to withdraw it, allowing your investments to compound over time.
Contributions to a Roth 401(k) plan are made after taxes are paid. While you take home a little less in your paycheck, the withdrawals you make in retirement are tax-free.
Compound interest
Think of your 401(k) like a snowball. While it might start off small it grows exponentially with time. The longer you have your 401(k) account the more money you’ll have by the time you’re ready to retire. To understand the impact of compound interest, here are two examples from Slavic401(k) that showcase the snowball effect.
Investing at Age 24
Meet Sarah, a recent college graduate who starts investing $500 per month in her 401(k) at the age of 24. Assuming an average annual return of 7% by the time Sarah reaches 65, her investments could potentially grow to over $1.5 million. The key here is time—Sarah benefits from decades of compounding returns, allowing her investments to snowball over the years.
Investing at Age 40
Jumping ahead to age 40, we have Emily. Emily realizes the importance of investing for her future and begins contributing $500 per month into her 401(k). However, starting at 40 means Emily has fewer years of compounding ahead. By age 65, her investments may grow to approximately $380,000. Although Emily is still benefiting from compound interest, her nest egg is considerably smaller compared to Sarah due to the delayed start.
What is employer matching?
Many companies offer 401(k) plans with employer matching as a perk to attract talent. Employer matching simply means that your employer contributes to your 401(k) account based on employee contributions, up to a set limit.
For example, if your employer had a 6% match and you put 3% of your paycheck into a 401(k), your employer would also put in 3%. If you max out the match and put 6% of your paycheck into your 401(k), your employer would put in an additional 6%. At an annual salary of $50,000 that’s an added $3,000 of retirement savings from your employer.
Think of your employer match as free money or an added salary boost. Not contributing to your 401(k) with an employer match means losing out on significant amounts of money.
Rollover options
If you’re planning to move jobs don’t forget to take your 401(k) with you! The money you invested into your 401(k) while employed is yours to keep. When changing jobs you’ll have multiple rollover options including:
- Move the money to your new employer’s 401(k) plan
- Work with a bank or financial institution and open your own retirement account called an IRA
Understanding these aspects of your 401(k) can help you make informed decisions about your retirement savings and maximize the benefits available to you. Have any questions? Be sure to consult with a tax professional or CPA for personalized financial advice.
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Have you ever reviewed your work benefits and skipped sections like 401(k) that seem confusing? Or ignored it because you felt like “present you” could use the money more than “future you?” If so, you’re not alone! In this article, we’ll help break down what a 401(k) is and highlight some key points that could change the way you think about it as you plan for your future.
What is a 401(k)?
Saving for retirement looks different for everyone, but a popular avenue people take is utilizing a 401(k) plan. A 401(k) is an employer-sponsored retirement savings plan that lets you invest a portion of each paycheck. Benefits include the following:
Tax benefits
Contributions to a traditional 401(k) plan are made with pre-tax dollars, which means your taxable income for the year decreases. Additionally, the investment earnings within the 401(k) plan will grow tax-deferred until you decide to withdraw it, allowing your investments to compound over time.
Contributions to a Roth 401(k) plan are made after taxes are paid. While you take home a little less in your paycheck, the withdrawals you make in retirement are tax-free.
Compound interest
Think of your 401(k) like a snowball. While it might start off small it grows exponentially with time. The longer you have your 401(k) account the more money you’ll have by the time you’re ready to retire. To understand the impact of compound interest, here are two examples from Slavic401(k) that showcase the snowball effect.
Investing at Age 24
Meet Sarah, a recent college graduate who starts investing $500 per month in her 401(k) at the age of 24. Assuming an average annual return of 7% by the time Sarah reaches 65, her investments could potentially grow to over $1.5 million. The key here is time—Sarah benefits from decades of compounding returns, allowing her investments to snowball over the years.
Investing at Age 40
Jumping ahead to age 40, we have Emily. Emily realizes the importance of investing for her future and begins contributing $500 per month into her 401(k). However, starting at 40 means Emily has fewer years of compounding ahead. By age 65, her investments may grow to approximately $380,000. Although Emily is still benefiting from compound interest, her nest egg is considerably smaller compared to Sarah due to the delayed start.
What is employer matching?
Many companies offer 401(k) plans with employer matching as a perk to attract talent. Employer matching simply means that your employer contributes to your 401(k) account based on employee contributions, up to a set limit.
For example, if your employer had a 6% match and you put 3% of your paycheck into a 401(k), your employer would also put in 3%. If you max out the match and put 6% of your paycheck into your 401(k), your employer would put in an additional 6%. At an annual salary of $50,000 that’s an added $3,000 of retirement savings from your employer.
Think of your employer match as free money or an added salary boost. Not contributing to your 401(k) with an employer match means losing out on significant amounts of money.
Rollover options
If you’re planning to move jobs don’t forget to take your 401(k) with you! The money you invested into your 401(k) while employed is yours to keep. When changing jobs you’ll have multiple rollover options including:
- Move the money to your new employer’s 401(k) plan
- Work with a bank or financial institution and open your own retirement account called an IRA
Understanding these aspects of your 401(k) can help you make informed decisions about your retirement savings and maximize the benefits available to you. Have any questions? Be sure to consult with a tax professional or CPA for personalized financial advice.
Sign up for our newsletter
Sign up for our monthly HIVE newsletter and get tips for finding a job, managing a business and advancing your career right in your inbox.