When you’re struggling to make ends meet every day, it’s hard to think about saving for the future. It can also be difficult to think about planning for retirement when you’re young and making good money. But money experts agree that the best time to start saving for retirement is when you’re young, and retirement is a long way off.
A 401(k) is a good way to save for retirement. So let’s start at the beginning – what is a 401(k)?
It’s a special account, offered through your employer, which allows you to take money directly out of your paycheck to save for retirement. As a reward for your pro-active savings, the federal government will allow you to defer paying taxes on the amount you put into the 401(k).
That means if your annual salary is $35,000 and you put $5,000 a year into your 401(k), your federal tax will be calculated on $30,000. You won’t pay taxes on any money you put into your 401(k) until you start taking it out of the account – hopefully when you’re retired.
You may think you can’t afford to put enough money into a 401(k) to make it worth your time. But crunch some numbers with an online 401(k) calculator, and you may feel differently. For example, according to Bloomberg.com’s online calculator, a 25-year-old making $50,000 a year, who invests just $1,000 every year until retirement, would end up with a 401(k) plan worth nearly $1 million.
There are some rules and regulations about how much you can put away in your 401(k) every year, and you can learn more about that at IRS.gov. You’re also restricted as to when you can take money out of the 401(k) without penalty. Take money out early, before you retire, and you’ll not only pay taxes on it, you’ll pay some penalties as well.
Some employers will contribute to your 401(k) as part of a benefits package. Usually, they’ll match your contribution up to a certain percentage. If your employer offers a 401(k) plan, participating in it is a great way to save toward retirement even if you can only contribute a little bit.