401k Explanation For Beginners
What Is A 401k Plan?
A 401k is a retirement plan offered by employers. You choose how much to automatically contribute from your paycheck and you choose the investments.
How Does A 401k Grow?
– Your contributions– Your employers matching contributions– Growth of your investments– Reinvestments of dividends
401k Matching Explained
If you contribute to your 401k, your employer may match your contribution. The most common match is 100% up to some percentage of your income.
Partial Matching Explained
For example, your employer matches "50% up to 6%." This means if you contribute 6% to your 401k per year, your employer will put in 50% of that contribution.
Vesting basically means how long you have to be employed before the employer match belongs to you.
What Do You Want
The optimal situation would be to have a company that matches a high percentage of your income (3% or more), match 100%, and have 100% immediate vesting.
The Average Return On A 401k
There is no such thing as a return on a 401k. A 401k is an account type your put money into that has a special tax law associated with it. The return you earn will be based on how you choose to invest your money.
– Do a 401k rollover– Leave it in the old 401k– Move it to your new employer if they offer a 401k
What To Do With My 401k When I Quit?
There is a contribution limit of $20,500 annually before taxes for those under the age of 50. You must begin withdrawing at age 72.
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