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Today I have a second guest post from Bob Wheeler over at The Money Nerve. Bob Wheeler is a certified CPA with more than 25 years experience, CEO of The Comedy Store, an LA-based landmark and author of the book, The Money Nerve: Navigating the Emotions of Money. Learn more about his simple concept of creating a life of proactive abundance. In this post Bob will be giving you a quick guide to the 401k. Enjoy!
What is a 401k?
Essentially, a 401k is a retirement savings plan sponsored by an employer. This plan allows workers to select whether they want a larger paycheck now or to defer some of their money by saving and investing a portion of revenue from their paycheck before taxes are taken out. Different from pension plans where companies managed employee’s assets, 401k’s give workers more autonomy to manage their retirement funds.
Matching Funds, Take It! It’s Free Money.
Many companies also match contributions, often with a 3% or 6% cap. With this type of 401k account, taxes are paid when a person begins to withdraw money. If you put in 3% of your $50,000 salary, or $1,500, your company puts another $1,500 in the pot. You can add more than that $1,500 yourself, but the company won’t match beyond 3%.
That’s a 100% return on your 3% investment! Try to beat those odds.
What Is The Best Type Of 401k To Open?Choosing whether to use a Roth 401k or a Traditional 401k is often determined by age and by salary level.Click To Tweet
If you are in a higher tax bracket, you may prefer lowering your salary by investing now and paying taxes later, thus the traditional approach may work best. For many people already in a lower tax bracket, it may make more sense to open a Roth 401k where you pay the taxes now. This plan also offers some qualified tax-free withdrawals. Just be sure to select a beneficiary or the person who gets your money if you die when you set up your 401k.
More often than not, your company is paying for a portion of the fees associated with your account. And in many cases you aren’t able to negotiate them. However, with all investments, it’s important to understand the fees you’re being charged. You want to keep that below 1 % for maximum savings power. Any higher and fees will be eating away at your returns over a long period of time.
How Much Can I Invest?
For 2017, the maximum amount of compensation that an employee can defer to a 401k plan is $18,000. Employees aged 50 by the end of the year and older can also make additional catch-up contributions of up to $6,000 for a total of $24,000. The maximum allowable employer/employee joint contribution limit remains at $53,000 for 2016 and $54,000 for 2017 (or $59,000 for those aged 50 and older). The employer component includes matching contributions, nonelective contributions and/or profit-sharing contributions.
Additional 401k Resources
If you’re curious about which options to choose or just need additional info, check out these sweet resources:
Guest Post – Ready To Invest: Ready To Invest: My first guest post and a great intro to investing.
So you’re ready to invest. What next?: A great M$D post about the first step to take before investing.
This 401k calculator can help you figure out how much you should be saving.
The 401k fee analyzer can show you how the investment fees in your plan stack up to others.
The NerdWallet IRA vs. 401k guide can help you maximize your retirement savings dollars in both types of accounts at once.
Make it Easy to Save
Make your 401k contributions automatically. You can even set up your plan to raise your level of saving each year. The more automated your financial plan is – the more likely you are to have a substantial nest egg when you get ready to retire!
What’s your experience with 401K plans and other investment vehicles?
-Bob @ The Money Nerve