One of the benefits many companies offer their employees is a 401(k) retirement account. A 401(k) (or 403(b) for non-profit organizations), allows you to put a cetain percentage of your pay into a retirement account. This is tax deferred, which means it is taken out of your pay before taxes are calculated.
If your company offers a 401(k) plan, you should take advantage of it. The biggest mistake people make is not getting into the plan. There are several advantages to getting into the 401(k) plan. The money you invest earns interest. Historically, the stock market has always increased in value over time. By investing your money in a 401(k), you are allowing your investment to grow so you will have money available to live on when you retire.
Because the money you invest is tax deferred, it lowers the amount of income taxes you owe each year. You only pay taxes on the money when you withdraw it from the account.
The second mistake people make is to not donate enough. Many 401(k) plans offer a company match. When you contribute money into the plan, the company will match a certain amount. Find out what percentage of your pay the company will match, and then contribute at least that much to the plan. Beyond that, you should invest as much as you can afford. remember, the money you invest will earn compound interest, so the more you invest, the more you’ll have in the account when you retire.
The other big mistake people make is to cash out of their fund early. Sometimes people get into financial difficulties, and they think that the money setting in their 401(k) would be useful to pay off some debts. this is a bad idea for two reasons. First, there is a huge penalty for early withdrawal. The IRS will take 20% of the money off the top. That’s money that you invested, and now it’s gone.
The other reason taking your money early is a bad idea is that you are using your retirement. The beauty of compound interest is that it builds momentum over time. the longer you leave your money in the account, the faster it grows. When you withdraw your money, you lose that momentum, and have to start over again. Chances are you will never reach the point you would have been if you had left your money in the account. If at all possible, find any other way to come up with additional money, but leave your money in your 401(k).
Retirement comes faster than any of us realize. Most Americans are not prepared when the time to retire draws near. Take steps now to make sure you’re not one of them.