401(k) plans have become increasingly popular in recent years as employers have phased out traditional pensions. Named for the subsection of the Internal Revenue Service code that allows for them, these accounts offer many benefits to employees, including tax breaks and the ability to save for retirement.
“Just having one is important,” says Jodan Ledford, CEO of Smart USA, a global record keeper that offers pooled retirement plan solutions. “It’s a great way to save for the future.”
There are some things to keep in mind when choosing a 401(k) plan, however. Here are three tips:
Make sure your employer offers matching contributions.
This is one of the most important factors to consider when choosing a 401(k) plan. Many employers offer matching contributions, which can help you save more for retirement. Make sure to find out if your employer offers this benefit before enrolling in a plan.
Consider the fees associated with the plan.
Many 401(k) plans come with fees, such as administrative fees and investment management fees. These fees can eat into your investment returns, so it’s important to consider them when choosing a plan. Look for a plan with low fees, or consider investing in a Roth IRA instead.
Decide how much you want to contribute.
401(k) plans have contribution limits, so you’ll need to decide how much you want to contribute. You can usually choose to contribute a percentage of your salary or a fixed dollar amount. If you’re not sure how much to contribute, start with a small amount and increase it over time.
401(k) plans can be a great way to save for retirement, but it’s important to choose the right plan for you. Consider your employer’s matching contributions, fees, and contribution limits when making your decision. If you withdraw money from your 401k prematurely, before the age of 59 1/2, you will incur a 10% tax penalty. Therefore it is always important to have additional safety nets set in place in order to avoid those tax penalties for early withdrawal.
Remember, the sooner you start saving for retirement, the better. A 401(k) plan can help you reach your retirement goals, but it’s important to choose the right plan for your needs. Consider these tips when making your decision.