Company sponsored 401k plans can seem complicated on the surface. Fear not, I hope that I can help simplify things. 401k plans are great tools to save and invest for the future. This post is in response to the many requests for help. This is going to be a foundational post. Wealth and wealth building are to come later.
The term 401K stands for an IRS code for retirement accounts. Past that I really don’t think it’s that important to know. Here are some simple steps to get you started.
• Step one – Roth or Traditional?
Under your 401k you have usually two options. The first, if available, is Roth the other is just referred to as Traditional or Regular. The main difference is tax implications. With Roth you invest after-tax moneys and Traditional is before tax. ( I highly suggest Roth whenever it is an option. All investment and growth are tax free past the withdrawal age of 59.5)
• Step two – What percentage?
Many employers match a percentage of your contribution. I encourage that being your starting point. If your employer is offering you free money. Take it. If they match 6% start with that. Many employers match dollar for dollar for your first 4 to 6% you invest. So youPast that did you choose Roth or Traditional? Roth has a max. The contribution limit for Roth 401k in 2020 is $19,500, up from $19,000 in 2019. So that means no more than 19.5% if your income is $100,000 a year.
• Step three – What investments do they let you choose from?
There are usually many funds to choose from. Investment elections can be incredibly difficult unless you do some research. If your not well versed in reading prospectus reports I’d keep it simple.
The easiest are target date funds. Pick one that puts you at 65 years old. (example, if your 50 in 2020. Your target date fund would be a 2035 fund) Going this route will get you started simply and cleanly.
Like I said this is foundational. I will create a few more posts covering this one topic. Your investment goals and time horizon to retirement all matter. This should get you started. For some of you, not watching your money everyday will be a challenge. Markets do rise and fall, avoid becoming stressed. We are the tortoise not the hare. And we all know who won the race.