A Cheat Sheet for Optimizing Your 401(k) Plan

They are often very simple to sign up for and your employer will handle the tedious task of investing it for you to make you, even more, money...what?!

However, if you work for yourself, then a 401(k) is not an option, but you can take advantage of some tax-free savings by opening an IRA.

Don't overlook saving for retirement when creating your monthly budget! Click To Tweet

If you are fairly young or still trying to pay off your mountain of student loan debt, retirement may be the last thing you are thinking about. But don’t be so quick to overlook socking away for retirement when you are creating your monthly budget!

Well, in short, a 401(k) is like a savings account that you get through an employer that stacks away money until you retire. You then use this savings to live off of while you are enjoying your retirement.

Plus there are a few advantages to these savings accounts, but also some restrictions that you should be aware of.

You can’t touch your money until you are 59 ½ OR if you are 55 and have already left your employer. As with any other type of savings account, the sooner you start putting money into a 401(k), the more it will accumulate.

A big advantage is that the money you put into the account is tax-deferred, meaning you don’t pay taxes on the money you put into the account, just when it is taken out.

The suggested rule of thumb is that you contribute 10% of your salary into the account. However, it is totally up to you and what you are comfortable putting away. As an indvidual, you are allowed to contribute up to $18,000 pre-tax into your 401(k) account, but again, do what you are comfortable with. Don't create a huge strain on your budget now just to put the max into your 401(k).

So why not just put the same amount into a savings account instead of letting your employer handle it?

Well, there are a couple different reasons, taxes being one advantage.

Like I said before, your contributions to your 401(k) account are tax-deferred, meaning the money in the account will continue to grow without having to pay income taxes on it. So what does this look like in real life?
Income - 401(k) contributions = total taxable income.
For example, let’s say you make a modest $55,000 a year and you contribute the total $18,000 you could (your living on a modest budget) that leaves you with $37,000. That $37,000 is what you actually pay taxes on.

"But don’t I still have to pay taxes on it when I use it for retirement?"

Well, yes. However, after you have retired and are living the good life, it is likely your tax rate will be lower than it is currently, saving you money in the long run.

Another HUGE advantage of a 401(k) over other retirement savings plans, is an employer match.

Many companies offer to match your contributions up to a certain percentage of your income. If you have a super awesome employer, they can match up to a 100% of your contributions, but only up to 10%-ok they are awesome, but not just gonna give everything away.

So 10% of your $55,000 income is $5,500 and they match 100% of that ($5,500). That is $5,500 in FREE money-you heard me folks-FREE MONEY! So at the end of the year that is a total of $37,000 in taxable income that you have made and $23,500 that you have saved for retirement that you didn’t need to pay taxes on! WOWZA!

At this rate, it would only take you 42 ½ years to save $1M! :-)

While all this cashola is sitting in your 401(k) is should be working hard for you, not just collecting dust, right?

When you initially setup your account your employer will most likely give you a list of options as to where you want your money invested-this can get confusing if you have no idea on what the different options are-stocks, bonds, mutual funds-this is where a professional can come in handy.

Take some time with this and find someone who knows what they are talking about then it comes to investing in your 401(k). Most likely, your human resources manager who is handing you the paperwork is NOT a CPA.

It is up to you to make sure your money is working hard for you, so choose carefully and choose wisely. You should always be able to change it up later if you think you can make your money work harder!

So what happens if you get let go or leave your employer?

Not all hope is lost, and neither is your money! If you change employers, retire early (before 59 ½), or your company lets you go, you have options.

You should be able to leave your 401(k) with the previous company and let it grow and start a new 401(k) with your new employer. Or you can simply roll it over into an Individual Retirement Account (IRA).

Always make sure that you check with your employer first-before there is a change. Also be aware, if you keep your 401(k) with a previous employer and you are not making contributions, and the employer is not making contributions, the money will grow much more slowly.

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