382
Wednesday, December 16, 2020

401(k)

This is the retirement account everyone is familiar with.  401(k) accounts are available through your employer.  Contributions come out of your paycheck before taxes are withheld, which allows for greater contributions.  Growth within the account is also tax-free.  However, you must pay personal income tax on money that you withdraw.

Contribution Limits

You are allowed to contribute a maximum of $19,500 per year.  Employers are allowed to contribute up to $57,000 per year on your behalf -- so any "match" your company provides as a perk goes in a separate bucket and does not count against the limit that you yourself can contribute.

Matching

Many employers offer a match on your contributions.  The amount and limit of the match is decided by your employer.  As a common example, a company might match 50% of your contributions, up to a maximum of 6% of your salary.  Thus, if your salary is $100,000 annually, then the first $6,000 that you contribute will be matched with up to $3,000 by your employer.  You would still be allowed to contribute more (up to the personal contribution limit), but your employer would not match those additional contributions.

BEWARE:  Some employers apply

Tax Benefits

401(k) accounts are funded with pre-tax dollars (you make deposits using money withheld from your paycheck).

401(k) accounts grow tax-free.

401(k) accounts are taxed as income when you withdraw money.  If you make the unfortunate mistake of withdrawing before age 59-and-a-half, you'll have to pay an additional 10% penalty on top of the taxes!  (Do not ever do this if you can avoid it)

Recommended Providers

Since a 401(k) is provided by your employer, you don't get to choose who manages your account.

Recommended Investments

Since a 401(k) is provided by your employer, you may have a limited selection of investments.  If you're lucky, you'll be able to choose an index fund or a target date fund.  Pay attention to the expense ratios -- you want to stay under 0.5%