Pensions are just about a thing of the past. The era of the pension fund is pretty much outdated and in the past, unless you are grandfathered into a union contract that is preserving that form of retirement planning. But the pension fund 2.0 has in recent years taken over the fund for retirement, also known as the 401k. Unlike the pension fund, which for the most part was modeled by the amount per week that was allocated from your paycheck either weekly or monthly, has been replaced by the 401k standard. This type of program also takes a percentage of your income that has yet to be taxed, allowing for greater growth in the long term. Understanding how your 401k works can give you an edge in funding your retirement and a life after working.
In the most simplistic of terms, a 401k is a retirement fund that you contribute money to in order to help fund your later years. Usually by common practice, your employer offers a matching contribution of what you are pouring into the fund. The concept is as follows: you contribute a percentage of your gross pay, matched commonly by your employer and let it compound over time gaining interest and remaining as an untouched or untapped fund for retirement. The benefit of this, is you are essentially getting a matching amount of money from your employer that can be seen as free money that won’t be taxed until you withdraw from the fund. The idea is that your money pre-tax compounding over time will accrue much quicker than the taxed version that you would via a pension fund. An additional benefit is that limits set by the federal government on how much per year could be contributed are rising. As of last year the max for someone younger than fifty years of age maxed out at $17,500. And if you were fifty years of age or older you could give a max of $23,000!
It is important to understand that your 401k is a retirement fund and there will be government taxed penalties for withdrawing the money earlier than the set retirement age. With that said, it is your money and you can withdraw it whenever you feel like it. But what you are losing versus what you could be gaining, should be understood before any action is taken. You could pay as much as a 10% penalty on your funds accrued thus far, just by taking it out early. I can hear it already, “What if I get a new job?” That is easily answered. Because we understand that withdrawing early is like taking the fund and throwing it away, before it can mature. You would do better for yourself, if you just rolled the current funds into an IRA or into another 401k; you should avoid cashing out at all cost. Why would you risk losing the money to taxes, when it can grow via other means. Should you find yourself not wanting to cash out, or tie up your funds in another 401k, you can always roll that money into stocks and bonds, as a third option. But make sure to do your research on what the interest rates are and how well the stocks and bonds can pay out for you, either in quarterly or yearly dividends.
Educate yourself on your 401k
It is important that you educate yourself on the rules and obligations, contributions expectations and tax exemptions that your particular 401k is to be subjugated to. Your employer would have all of this information, and by reading through it all, you are giving yourself the best opportunity to grow this pre-taxed monetary fund. You should see if there are any other limits or rules that are placed on your 401k by your employer, as it is up to the individual company to place restrictions, if any, additional to those imposed by the federal government. The retirement age keeps changing. Years ago you could retire at the age 62 and retrieve all your saved up retirement money with limited penalties. Now, the age to pull your money free of penalties from the government takes place when you are 70 1/2 years of age.
Understanding the plan fully that you are placing your money into for retirement can give you a better edge over anyone else, when it comes to funding the plan. With knowledge comes power, and understanding how 401k’s work as well as how your individual one will work, can only help you make decisions that can help grow your retirement money without hurting your long term compounding funds. You are well on your way to financial security, because you understand that it is a day by day way of life, and understanding your finances and your future and retirement through your 401k.