I’m sure by this point you know it is very important to save into a retirement account so that at one point you can stop working. But this can be confusing to navigate when you are unsure of what the different accounts are and how they work. The numbers and letters are thrown around so often it can be easy to feel like you should just KNOW what everything means. But what exactly is a 401(k)?
Simply put, a 401(k) is a retirement savings plan that comes from Section 401 part k of the IRS tax code. It is what is known as a “pre-tax” investment which means that generally you are able to deduct annual contributions on your taxes each year. Once the money is in the account, it grows tax-free until you withdraw the money. At that point, you will have to pay taxes on your initial investment and also any growth that has accumulated.
If your employer has a 401(k) available for you to invest in, most times they will also offer a match up to a certain percentage. For example, some employers may match dollar for dollar up to 6%. So if you invest 6% of your paycheck into your 401(k), your employer will match that 6%. That’s FREE money!
401(k)’s can be a fantastic vehicle to accumulate money for retirement. While it can be confusing with so many different types of accounts the key is to get started saving and never turn back!
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