5 Steps to a Healthy 401(k) Plan

401(k) plans offer a number of benefits and can help you build up that all-important savings cushion you need for retirement. If your employer is contributing to your 401(k) and you are being consistent with your own contributions, you can build up a healthy savings account and look forward to a comfortable, stress-free retirement.

However, there are several things you need to do to make sure your 401(k) account stays healthy. Here are just five steps to a healthy 401(k) plan:

1. Be aware of your rights. You can start contributing to your 401(k) plan after one year of being with your employer. Take some time to learn about your rights as an employee and the benefits you are eligible to receive after one year of employment.

2. Automate your 401(k). Set up an automatic transfer of your contribution after each paycheck so that you don’t have to take the extra steps to make an actual deposit into the account. Automating your contributions can make it much easier to just “set it and forget it”. You’ll be able to build up that 401(k) account without having to think about it each time you receive your paycheck.

3. Take advantage of employer-matching. Check with your employer’s HR department to learn about your benefits and find out if you are eligible to receive an employer match for all contributions. Many corporations and some small business owners do match employee contributions, and this can be a great benefit for you in the long-run. Remember that these contributions are completely tax free, so you are essentially getting a “tax free raise”.

4. Don’t borrow from your 401(k) when you’re strapped for cash. If you’re running low on funds and need cash fast, don’t borrow from your 401(k) account. You will be paying a price for taking out this loan and will have to pay a penalty for withdrawing from the account. If you do end up leaving your job that is paying for some of your 401(k), you will have to pay the penalty and taxes on the withdrawal, unless you repay the entire amount in full.

5. Contribute up to the maximum amount whenever possible. You are permitted to contribute a certain amount each year and the IRS adjusts this limit on a regular basis. Make sure you know what this amount is so that you are contributing up to this amount year after year. Remember that none of those dollars will be taxed, so it is in your best interest to contribute as much as possible up to the contribution limit.

Tags: 401k, 401k account, 401k advice, 401k basics, 401k plans, 401k rules, 401k tips

Benefits of Investing in a 401k versus an IRA

Many people open an IRA account in their early twenties in hopes of saving a significant amount of money for their retirement and cashing in on the tax-free benefits. IRA accounts do offer several benefits, but so do 401k plans. Company 401k plans are very similar in scope to traditional IRA accounts because the contributions are invested before any taxes are taken out.

This lowers the account holder’s adjusted gross income, which means the account holder pays less taxes each year without any penalties. However, there are a number of benefits of shifting contributions to a 401k plan. Here’s a close look at the benefits of investing in a 401k when compared to an IRA:

Understanding Types of IRA Accounts

Individual Retirement Accounts (IRAs) are a popular investment strategy for many people. These are individual investment accounts, so there are no company matches involved. The two types of IRA accounts available are Traditional IRA and Roth IRA accounts. The biggest benefit of having a traditional IRA account is that the funds can be deductible and any money invested before taxes will give you an immediate tax break.

Roth IRAs are non-deductible, but the distributions made during retirement are exempt from taxes. This is one of the key reasons why people choose a Roth IRA instead of a traditional IRA. If you are interested in becoming an IRA account holder, you need to meet certain tax and income requirements, and eligibility is based on your overall income, marital status and filing status.

Choosing Between 401k and IRA Accounts

One of the key reasons why people choose a 401k plan is because many employers will be able to match contributions throughout the individual’s career. However, some company 401k plans have several limitations and may end up costing you more in the long run. IRAs are attractive investment accounts for others, because they are individually-owned and controlled. The account holder gets to choose how much they want to invest each month, and where their investments are going. For example, IRA account holders decide whether they want to invest their money in ETFs, stocks, bonds, or other types of funds. Roth IRA plans have the added benefit of allowing for tax-free withdrawals.

If the company you are working for doesn’t offer a company 401k plan or contribution match, your best option may be to open a Roth IRA account. Roth IRA accounts give you a lot of flexibility and allow you to withdraw your money without paying taxes during retirement.

There are a number of benefits of investing in a 401k, instead of a traditional IRA or Roth IRA. However, 401k plans may have some limitations. Talk to your financial advisor or human resources department at your company to discuss the benefits and drawbacks of these accounts, and make the most informed financial decisions for your future.

Tags: 401k advice, 401k plans, retirement plans, roth ira