3 Things To Remember When It Comes To Your 401(k)

With the uncertain future of Social Security, younger Americans need to find other ways to secure their future retirements. One excellent (and easy!) option is the employee-sponsored 401K.

Here’s how it works: A small percentage of your salary is deducted from each paycheck before taxes and placed in a professionally managed retirement plan. You are able to increase or decrease that contribution up to a certain maximum for the year. If your employer offers matching contributions—and many do—then your money is effectively doubled.

That’s an attractive deal for most Americans. Given that, here are three things to keep in mind when it comes to 401(k) participation.

1. Start as soon as you can.

Compounding interest is a wonderful thing. For example, if you assume an 8% average return, the money you put into your 401(k) will double every seven years. Not only that, but the earnings from your account are invested back into the plan, growing your nest egg that much faster. If you’re also continuing to contribute from each paycheck to your plan, your 401(k) will be set for maximum growth and you’ll have a nice nest egg for retirement.

While a 401(k) plan may not be for everyone, it does offer great benefits if you choose to participate, giving you a real head start in securing a happy retirement.

2. Make the maximum contribution.

Your 401(k) contribution is taken out of your paycheck before taxes and grows in a tax-free environment. You only pay tax on it (as income) when you withdraw the money at retirement. Furthermore, the money you contribute from your paycheck lowers your taxable income, which will give you a small break on the taxes you’re paying right now.

When you add that to the power of compounding interest, you see why it makes sense to contribute the maximum yearly amount to your 401(k)—in 2016, the upper limit was $18,000 for Americans under 50. If you’re over 50, the plan offers a catch-up option and you can contribute a maximum of $24,000 a year.

3. If you leave your current employer, you have options regarding the money in your account.

While you can always cash out and take the money, this is a bad idea. Not only do you then have to pay taxes on the full amount, but you’ll also get socked with a 10% early withdrawal fee.

A wiser choice is to simply move your money to your new employer’s plan (assuming they offer one and allow such a transfer). This will keep your money growing tax free. Alternatively, if your new employer doesn’t offer a 401(k), you can opt to keep your money in your previous employer’s plan (if they allow it).

If you’d like to expand your investment options beyond those offered in your 401(k), you can always opt to transfer your money to an IRA rollover account. If this is your choice, go for a direct rollover, wherein your employer sends the money directly to the company managing the IRA (which keeps it from being taxed in the transfer).

While a 401(k) plan may not be for everyone, it does offer great benefits if you choose to participate, giving you a real head start in securing a happy retirement.

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