What 401(k) Option Works Best For You
Oh, retirement. We all dream about it, yet most do not start planning for it until they get that “good” job which makes them feel secure and offers a 401(k) option.
However, the sooner you start, the happier you will be in the future.
Free Money:
Having a 401(k) with employer matching is AMAZING and something everyone should take advantage of. It is free money!!! Retirement stocks and bonds are some of the safest on the market, too. Meaning free money is building on top of free money.
If your employer is offering a 401(k) option but you are not sure whether or not you can financially swing it, start with contributing as much as your employer is willing to match. If they will match 4% of your investment in your future, so should you.
Money Talks:
Let us look at the math. (YAY! Math! )
I have a friend who works as an educator for special needs students at a high school, her monthly salary is $1500 – travesty, much? (please support your schools and teachers!)
Take that $1500 and multiply it by 4% and you get $60.
While I do not want to dismiss that that is still a lot coming out an already small paycheck, just think of it as a few less takeout meals and few less specialty coffees. Which is better for your health, anyways!
But, what that equates to is $120 being put into your 401(k) for your future. While $120 can seem a little bit more than you can comfortably take, $60 is a lot more reasonable with $120 total still being contributed to your retirement. Win, win!
Different 401(k) Options:
You will generally be presented with two options; pre-tax or Roth.
Pre-tax / Traditional / Standard:
So many names! But they all mean the same thing.
There is the amount withheld from your paycheck for your retirement and then you will get taxed on the remaining balance. In the example above, instead of getting taxed on $1500, you will get taxed on $1440 ($1500-$60).
If you are on a tight budget, this might be a good way to help ease into that additional money being taken out because less taxes are being withheld.
This does mean that at retirement, you will be taxed on the money being withdrawn because it was never taxed to begin with. So keep that in mind when planning for your future. Do not let that take you by surprise.
Roth:
For a Roth, you will get taxed as usual, and the $60 is just another deduction on your paycheck.
Let us fast forward with those contributions and say you grew your retirement fund to get $3000/month at the age of 60. With a ROTH, you get that full $3000 because the money you put in was already taxed.
In comparison, a pre-taxed plan you will be taxed on that $3000 and you get the net, or remaining balance.
The thing to consider with employer contribution portion is that it will be taxed upon distribution, though, because it was never taxed to begin with in a Roth.
Don’t Like Your Employers Plan?
Ask if they will match an IRA of your choosing. Not saying they will, but it cannot hurt to ask. In my home state of Oregon, there is a state run IRA that makes it easy for employees and employers to contribute to a retirement fund.
I am a huge advocate for investing in your own future. The usual saying is, ‘no one will do it for you’ but 401(k)’s are the exception to that rule. Let your employers do some of the work, you deserve it.