You probably already know that participating in an employer 401k plan is a good way to put aside money for your retirement, especially if your employer provides a 401K matching program. But there are some things to keep in mind when planning your 401K contributions, like the annual limits for investments, for example.
Here are four tips that will help you take full advantage of the benefits of saving for retirement with a 401k plan.
Put aside some money every single pay period for your retirement, whatever you can manage, even if it’s just 2% or 3% of your pre-tax salary. Over the years, it will certainly add up.
If your employer matches all or a portion of your contribution, that’s even better. In general, many employers offering a 401K plan also provide matching contributions. Some will do a full match of your contributions up to a certain dollar amount, and others will match a portion of what you’re putting in. For example, instead of just 3% of each paycheck going into your 401k, your employer could double that amount with a full match.
It’s a good idea to review your 401K plan with your employer and do the math when deciding how much to contribute to your plan. Otherwise you may be leaving free money on the table and not maximize your 401K.
2. Benefit From the Tax Advantages
Contributions to a 401K plan use pre-tax dollars. So funding your retirement this way can help to lower your taxable income and reduce your tax bill. And depending on your income, you may be eligible for a retirement savings contributions credit by participating in a 401K plan.
3. Keep Your Hands Off the Money
Borrowing or withdrawing money from a 401K plan before you reach retirement age can carry stiff penalties except in very specific circumstances. Not only will you have to pay taxes on the amount you withdraw but also a 10% early withdrawal penalty. If you’re desperate for money, consider other alternatives like credit cards, personal loans or borrowing from friends or family to find the funding you need. Keep your 401K dollars tucked away for retirement, and you’ll be able to watch it grow and accumulate over the years.
4. Pay Down Debt and Plan for Retirement
If you are trying to pay off a mountain of debt, it is tempting to put all your extra money toward paying down student loans, credit cards and other debts, and to neglect your retirement plans. By all means, you should focus on paying down high-interest debt, but at the very least try to contribute enough in your employer’s 401K plan to receive an employer’s free and matching contribution. And when your debt levels lower, you can contribute more and more to your retirement plan. You can see how your debt is affecting your credit by checking your two free credit scores, updated every 14 days, on Credit.com. Checking your credit scores will not harm them in any way.