Taking Advantage Of An Individual 401 K
More than just a good wage, employers have to offer solid benefits to entice prospective applicants. Among those, most look for some way to save for retirement and an individual 401 K is one of the most common offered by employers. This is a simple way for employees to begin putting aside money for later and while the rate of return tends to be gradual, being able to see it grow and see the contributions of your employer as well can be a strong motivator to either accept an initial job offer or stay with an employer for the long haul. With a well funded individual 401 K, even the average 9 to 5 employee can count on a sizable nest egg when they reach retirement age.
Along with its simplicity, an individual 401 K also comes with some restrictions. There is a limit to the amount which can be deposited, outside of a regular schedule of contributions, normally not more than $5,000 in one calendar year. As well, there are limitations applied to withdrawals. Any funds drawn from a 401K prior to age 65 are subject to additional penalties as well as regular income tax rates. However, given that contributions are untaxed during the year, this penalty seems relatively easy to avoid if the funds are not needed. Many individuals are able to put away several hundred thousand dollars during the course of their employment, assuming their employment is not interrupted and their employer offers a matched contribution plan.
While not all employers offer it, offering matched contribution for employee individual 401 K plans is very nearly the same as offering additional wages. These are often capped at less than 5% of the employee's wages, but given that contributions are made from each paycheck, the potential for additional savings is obvious. Effectively, an employee contributing below the employer's match cap can double the amount they save. Few financial advisors would argue with the wisdom of taking full advantage of these sorts of benefits. While 401K plans may not have the fastest rate of growth, they are substantially better than what the average hourly employee might otherwise have access to, much less be able to afford.
Planning for retirement is never something that young people consider early on, those that do often end up in a much better position as a result. With access to a 401K, along with matched contributions, someone beginning to save in their early twenties can see a remarkable return once they reach the end of their working years. At retirement age, there is the potential for someone contributing as little as 3% of their wages to have more than one million dollars waiting for them. Assuming even a moderate rate of return, this is not an unreasonable or unheard of result. The question for new employees considering taking advantage of their employer's retirement savings plan is simply one of degrees. The more they're able to contribute and the sooner they're able to start saving, the more they'll have access to later.
No one can predict the future and playing the stock market is not without risks, but utilizing a retirement plan like a 401K offers a chance to minimize that risk and spread a person's earnings over a much longer period. A 5% rate of return is considered good, when applied to savings that may span over more than forty years and may do little more than grow during that time. As with any 401K plan though, all of an employee's contributions and earnings are considered 100% vested, meaning that all earnings belong to the individual at all times, so even if there are penalties for early withdrawals they are still allowed, up to the full amount of the plan.
Along with its simplicity, an individual 401 K also comes with some restrictions. There is a limit to the amount which can be deposited, outside of a regular schedule of contributions, normally not more than $5,000 in one calendar year. As well, there are limitations applied to withdrawals. Any funds drawn from a 401K prior to age 65 are subject to additional penalties as well as regular income tax rates. However, given that contributions are untaxed during the year, this penalty seems relatively easy to avoid if the funds are not needed. Many individuals are able to put away several hundred thousand dollars during the course of their employment, assuming their employment is not interrupted and their employer offers a matched contribution plan.
While not all employers offer it, offering matched contribution for employee individual 401 K plans is very nearly the same as offering additional wages. These are often capped at less than 5% of the employee's wages, but given that contributions are made from each paycheck, the potential for additional savings is obvious. Effectively, an employee contributing below the employer's match cap can double the amount they save. Few financial advisors would argue with the wisdom of taking full advantage of these sorts of benefits. While 401K plans may not have the fastest rate of growth, they are substantially better than what the average hourly employee might otherwise have access to, much less be able to afford.
Planning for retirement is never something that young people consider early on, those that do often end up in a much better position as a result. With access to a 401K, along with matched contributions, someone beginning to save in their early twenties can see a remarkable return once they reach the end of their working years. At retirement age, there is the potential for someone contributing as little as 3% of their wages to have more than one million dollars waiting for them. Assuming even a moderate rate of return, this is not an unreasonable or unheard of result. The question for new employees considering taking advantage of their employer's retirement savings plan is simply one of degrees. The more they're able to contribute and the sooner they're able to start saving, the more they'll have access to later.
No one can predict the future and playing the stock market is not without risks, but utilizing a retirement plan like a 401K offers a chance to minimize that risk and spread a person's earnings over a much longer period. A 5% rate of return is considered good, when applied to savings that may span over more than forty years and may do little more than grow during that time. As with any 401K plan though, all of an employee's contributions and earnings are considered 100% vested, meaning that all earnings belong to the individual at all times, so even if there are penalties for early withdrawals they are still allowed, up to the full amount of the plan.
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