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Saving for retirement doesn't
need to be complicated or painful. Check out these tips on how 401(k)
savings plans work and take advantage of the savings offered by
your employer.
1. Start participating in
your employer sponsored plan now: Time
is on your side. The sooner you start contributing to a 401(k),
the longer your money has to grow. Even if you only contribute 2
or 3 percent, it's a start.
2. Know your rights:
By law, you are eligible to start contributing to a 401(k) plan
after one year of service; your employer can't make you wait longer
than that.
3. Pay yourself first:
Out of sight, out of mind. Your contributions are taken directly
out of your paycheck and deposited straight into your 401(k) plan.
4. Contribute to the max:
It's simple, but true. The more money you put in a 401(k) plan,
the faster it will grow. Participants can contribute up to maximum
of $15,500 annually ($20,500 if you're 50 or older). Pretax limits
are adjusted each year for inflation. These plans are portable
and can be rolled over into an IRA or to another 401(k) if you change
jobs.
5. Free money: Many
employers offer matching contributions. Take advantage! It's like
a tax-deferred raise.
6. Pretax benefits:
401(k) contributions are not taxed until you pull your money out.
Saving pretax gives you more money to invest. Because taxes take
a large bite out of each dollar you earn, you have to save more
after-tax dollars to get the same impact as pretax saving. Plus,
saving pretax dollars lowers your taxable income, which means you'll
pay less to the IRS.
7. Keep your hands off your retirement
savings: Financial advisers warn against
borrowing from your 401(k), even if it's to get rid of credit card
debt. Essentially, you're robbing your retirement. If you do borrow,
the loan has to be paid back in five years or you will be slapped
with a 10-percent penalty. Plus, in most cases, if you leave your
job, you'll also pay the penalties and tax unless you repay the
loan in full.
8. Be flexible and look long-term:
As the years go by, life changes; so should your retirement savings
strategy. Review your 401(k) plan quarterly, and definitely annually
to ensure it still meets your needs as retirement approaches.
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