Most private companies offer a 401(k) retirement plan. When you begin a new job after graduating from college, you will be asked if you would like to contribute to the company’s 401(k) plan. Recent college graduates just starting their careers are usually not focusing on retirement.
Should you be thinking about retirement this early in your career? The answer is YES. You should take advantage of your employer’s 401(k) as soon as you are eligible. Here are some of the reasons:
- It is a painless way to save money for your future. Your company automatically deducts your contributions every time you are paid. You can contribute a specific dollar amount or as a percentage of your wages from each pay check. After a while, most people don’t even realize this money is coming out of their pay check. The maximum amount you can contribute to your 401(k) plan in 2018 is $18,500 if you are under 50 years of age.
- You can get additional money from your company. Most companies offer some kind of employer match to encourage workers to participate. At the least, contribute the minimum dollar amount necessary to max out your company’s to 401(k) match into your retirement account.
- You can get tax breaks when you contribute to a 401(k) plan. The money you contribute from your salary is pre-tax so all of the dolars are being invested. Also, the money in your 401(k) account increases tax-deferred. The earnings in your account are re-invested into your plan. The interest and dividends are not taxable on your tax return until you withdraw the money from your account. Your retirement account can grow faster because these earnings are re-invested.
- The money is portable so you can take your money from your account if you change jobs. Your best option at that time is to roll the balance over into your new employer’s plan or another type of retirement plan, such as an IRA. This is a simple procedure and will still keep your retirement account balance tax-deferred.
- Loans and hardship withdrawals may let you take money out of your account in an emergency. Most plans offer loans (which you have to repay) or hardship withdrawals (which you don’t, but is taxable) as a way of taking money out of your 401(k) plan in an emergency. But, taking money out of your plan early comes with strings attached. It is recommended to explore other options before you withdraw your money before age 59 ½ to avoid penalties.
The road to retirement is a long one and the sooner you start the more you will accumulate in your retirement plans. There are other financial goals that you will also want to save money for such as a buying a home or starting a family, just don’t ignore your retirement and the benefits of contributing to your company’s 401(k) plan. If you need further advice on contributing to your employer’s 401(k) plan, contact our office with any questions.
Brian Reilly, Manager