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A 401k retirement plan is a company sponsored qualified retirement plan for employees. You aren't subject to federal and most state income taxes for your contributions and earnings in the plan, until you withdraw the funds.
This plan lets you save money on a pretax basis plus you've the extra benefit with most employers contributing matching funds (to make the plan even more lucrative).
You'll have the choice to decide how much you want to contribute (up to the maximum allowed by the government) and where you want to invest your contributions (from a list of funds provided by the plan sponsor).
Find out when you're eligible to start participating in your company's 401K retirement plan. Once you're eligible, sign up for it and start to contribute per month.
Your contribution will automatically be deducted from your pay check before taxes. Your contributions along with any matching funds from your employer are then invested into your selected funds.
This plan may have a vesting period where you must be employed for a defined number of years before you own all of the money in your account. Your contributions are vested immediately but your company matching funds don't belong to you until you meet the vesting requirements.
Different company has different vesting process so it's to your advantage to find out exactly when you'll become vested. Also, the vesting schedule shows you how much of the company matching contributions and earnings on those contributions that you own at any given time. If you leave the company before you're fully vested, you'll lose the unvested portion of the money in your plan.
When you turn 50, you can invest in a catch-up amount besides the maximum for each year.
How To Maximize Your 401k Retirement Plan
The best way to maximize is to participate in the plan.....Simple.
Then, contribute to the maximum you can afford, up to the limits placed by the government or your plan. If you can't afford the maximum, at least contribute to the amount necessary to get your company matching funds. Think of it this way: your contribution is a form of payment to yourself and the matching funds an extra bonus.
The earlier you start to contribute the better as you'll accumulate more money at retirement. The other upside of starting early - you've time on your side to recoup fluctuations or losses encountered in your investments.
Learn all you can about the funds offered for investment so you can make the best choice possible. And keep doing research on the funds offered so you can be ready to rebalance your investment if need to.
Matching Funds
I touch on this because it's literally "free money" for you! Why?
Say your company provides the benefit of a company match, and you contribute to earn your employer's maximum matching contributions. You'll have a 100% growth if your employer matches you dollar-for-dollar. Even if the match is 50 cents on the dollar, that's still an instant 50% growth.....Hey! You can't get that kind of growth anywhere else.
Withdrawing Money
Under present law, you can begin to withdraw money from your 401k account when you reach the age of 70. You might be able to defer this withdrawal rule if you're still a full time employee with the company sponsoring your 401k.
You might be able to start withdrawing at age 59 without any early withdrawal penalty. You're also exempt from this penalty if you're over 55 years old and have been let go by your company or if you become totally disabled.
Some 401k retirement plans allow you to take loans against the money in your account, up to a maximum of 50% of your savings. The money you borrow isn't subject to the early withdrawal penalty as long as you pay it back (with interest) within the time stipulated.
You could have up to 5 years to repay the loan, but if you leave the company, you must repay within 30 days. Any amount you fail to repay is subject to the early withdrawal penalty and taxes. And the interest you pay goes directly into your account.
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