The 401K is probably the most common retirement vehicle in place today.
The basic definition of a 401K is a plan offered by your employer that allows you to systematically save for retirement. In most cases the employer will even match some of your contribution - say 50% up to 6% of your salary that you contribute. Let’s look at an example.
In this example, say you make an gross annual salary of $50,000 per year.
You contribute 10% of your salary to your 401K and your employer matches 50% up to 6% of your salary that you contribute.
Salary:$50,000
Your contribution of 10%: $5,000 ($50,000 X 10%)
Your employer match: $1,500 ( [$50,000 X 6%] X 50%)
TOTAL 401K contribution: $6,500
In this calendar year, with your employee match, you accumulated 13% of your annual gross salary in your 401K. The important thing to remember is to try and contribute at least the minimum amount to get the full employer match. In the example above, that was 6%. Your employer only matches what you contribute up to a certain amount, so if you are not contributing, you will NOT qualify for the match.
Some other advantages of a 401K:
1. Your contribution is pre-tax dollars. This means that you are contributing money that you have not paid taxes on yet.
2. By contributing, you are reducing your taxable income base, so you will pay less in income tax as well.
Note: 401K contribution are taxed when they are withdrawn, so the government will get their money. However, most financial advisors or planners will tell you to do all you can to reduce your tax burden currently.
3. Most companies service their plan through a company (such as an investment planning company). Usually they will have a plan representative who can provide information about the plan. Sometimes they will also offer investment advice based on your goals.
There is a limit to what you can contribute (because the government is not willing to lose that much tax revenue):
2008 maximum contribution was $15,500
2009 maximum contribution was $16,500
In some cases depending on age, the government will also allow you to contribute extra to “catch up”. These amounts vary, and it would be best to consult an accountant or investment advisor for this information.
The basic definition of a 401K is a plan offered by your employer that allows you to systematically save for retirement. In most cases the employer will even match some of your contribution - say 50% up to 6% of your salary that you contribute. Let’s look at an example.
In this example, say you make an gross annual salary of $50,000 per year.
You contribute 10% of your salary to your 401K and your employer matches 50% up to 6% of your salary that you contribute.
Salary:$50,000
Your contribution of 10%: $5,000 ($50,000 X 10%)
Your employer match: $1,500 ( [$50,000 X 6%] X 50%)
TOTAL 401K contribution: $6,500
In this calendar year, with your employee match, you accumulated 13% of your annual gross salary in your 401K. The important thing to remember is to try and contribute at least the minimum amount to get the full employer match. In the example above, that was 6%. Your employer only matches what you contribute up to a certain amount, so if you are not contributing, you will NOT qualify for the match.
Some other advantages of a 401K:
1. Your contribution is pre-tax dollars. This means that you are contributing money that you have not paid taxes on yet.
2. By contributing, you are reducing your taxable income base, so you will pay less in income tax as well.
Note: 401K contribution are taxed when they are withdrawn, so the government will get their money. However, most financial advisors or planners will tell you to do all you can to reduce your tax burden currently.
3. Most companies service their plan through a company (such as an investment planning company). Usually they will have a plan representative who can provide information about the plan. Sometimes they will also offer investment advice based on your goals.
There is a limit to what you can contribute (because the government is not willing to lose that much tax revenue):
2008 maximum contribution was $15,500
2009 maximum contribution was $16,500
In some cases depending on age, the government will also allow you to contribute extra to “catch up”. These amounts vary, and it would be best to consult an accountant or investment advisor for this information.