Understanding your 401k can be a hard thing to do. This is because a 401k is a rather complicated concept. Your 401k is a special retirement planning investment vehicle which is named after the part of the tax code which led to its formation. You can choose how your 401k is invested - most people do so in money market mutual funds, which are regarded as the safest forms of investment. If you don't mind added risks, then you could choose a more aggressive investment approach for a higher rate of return. The key to a healthy 401k though is to let it grow over time.
If your employer has automatically enrolled you in a 401k then you might not even know. Many employers automatically enroll their employees as part of their initial benefits packages. If your employer has enrolled you, then your savings would be withheld from each paycheck and placed into your 401k. You might have noticed some money which is being withheld from your paycheck and thought it was for taxes. Fortunately, you will be getting the money from your 401k back, unlike tax payments.
There are many different types of 401k. You should confer with your 401k administrator to fully understand your 401k. This is one of your first steps in fully understanding your 401k.
You might have an employer matched 401k which would mean that your employer will match up a certain percent of the money that you put into your 401k. Each employer has a different formula when it comes to how much money they will match. Talk to your employer to find out what kind of 401k you have. Even if you don't have an employer matched 401k, you will be better off if you place some savings into the 401k.
You can also choose to not pay taxes on your 401k at the time you place the money into the account. This is called tax deferral. Therefore it is in your best interests to take advantage of any 401k which is offered by your company. Even if your company does not offer a matching 401k you will still avoid paying taxes on your investment. Lower taxes means more money saved.
If you do have an employer matching 401k then you should put into your 401k the maximum amount that your employer will match up to. This is essentially free money as your employer will be placing the matching funds into your account. According to financial advisors you should aim to save 15% of your salary in your 401k. If this is too high of a percentage then you could try for 10% of your annual salary.
The idea is that you will be better off in the future if you make plans for your retirement as early as possible. Your 401k is the safest way to save for the future. This is because it has many benefits you wouldn't have if you invested on your own. The tax deferred savings, the employer matched savings, and the ability to choose your own investment strategy makes the 401k the premier choice when it comes to investing for your future.