How to Set up Your First 401(k)
On your first day of work, your HR representative may have told you about an employee benefit called a 401(k) — and that your company would even match your contributions up to a certain percent. Problem is, you may not be sure what a 401(k) is and why you should have one.
The short answer is this: a 401(k) is one of the best financial tools available to help you save for retirement.
The basics of a 401k plan
Think of a 401(k) as an account where the Internal Revenue Service (IRS) lets you stash money away for retirement on a pre-tax or post-tax basis. A small amount of money comes out of your paycheck each pay period and is invested in Mutual Funds, Exchange Traded Funds (ETFs) or other assets as part of your 401(k) account. For 2020, you can take up to $19,500 out of your paycheck, if you are age 49 or younger, and put it into your 401(k) account.1 If you are 50 or older, you can put an additional $6,000 into your 401(k) account for a total of $24,500 to help you catch-up saving for your retirement.
With a 401(k), your employer takes a small amount of money out of your paycheck and invests it to help you save for retirement.
Because the money you put into your 401(k) account is automatically withdrawn from your paycheck by your employer, you don't feel the pain of saving the money because you never had it in the first place.
While some workers ease themselves into retirement slowly, there's no reason to hesitate when your employer is offering a 401(k) plan. You can hit the ground running from the very beginning of your career and get a jump-start on saving for your retirement years. Just be aware, as with other types of investment or retirement savings accounts, there is a penalty for early withdrawal and accounts fluctuate in value.
Select the type – Roth or Traditional
There are two primary types of 401(k)s: Traditional and Roth.
- A Traditional 401(k) allows you to save for your retirement on a pre-tax basis. This means that you do not pay income tax on the money you contribute to the 401(k). Instead, you pay income tax on the money when you withdraw the money during retirement. The reduced tax burden can make it easier for you to save money now.
- By contrast, contributions to a Roth 401(k) are made with post-tax dollars. This means you won't owe taxes on the qualified distributions you withdraw from your Roth 401(k) after retirement because you have already paid the taxes on the amount you contributed. Note that the earnings in a Roth 401(k) may be taxable if you withdraw early.
Select your investment option
Your employer may offer multiple investment options within your 401(k), which can feel overwhelming. Don't let the variety of options keep you from making contributions to your 401(k). Many large companies work with investment companies that can recommend what to invest in and how to allocate your retirement savings based on your age, risk tolerance, and estimated time to retirement.
Spreading your contributions out across different types of investment options helps diversify your money and can be a good strategy for investing in your 401(k). Many 401(k) plans offer free tools to help you learn more about your options.
Make your money grow with a match
A 401(k) match is a valuable benefit, so if your employer offers one, you should do everything possible to take advantage of it. The most common type of match is 50% of your contribution, up to 6% of your annual salary. So if you put in 6% of your salary into your 401(k), your employer will put in an additional 3%. That's like free money every month your employer is saving for your retirement. It's wise to take advantage of it.
How to maintain your 401(k)
Just because you've set up your 401(k), it doesn't mean your work is done. Like a plant that you're nurturing, you'll want to check on it regularly to see how it's progressing and growing. There are two main things you want to remember:
- If you change jobs, don't forget to roll your old 401(k) plan over to your new employer (especially if your new employer's plan is better), or to talk with a ERISA Fiduciary Advisor, who can help you decide how to continue investing for retirement. Having multiple 401(k) plans from former employers in different places can make it more difficult to keep track of your investments.
- Know your vesting schedule, which is how much of your employer's contributions to your 401(k) are truly yours, regardless of your employment status with that employer.2 With many employers, you need to work at the company for a few years before you can keep their contributions to your 401(k) plan after leaving the company.
Employer-based 401(k) plans are an easy way to start saving regularly for your retirement. By capitalizing on employer-matching funds and tax benefits, you can make significant headway in saving for your retirement.
If you have questions about your 401(k) plan, talk with your company's benefits team. If you're interested in talking with a Synovus financial consultant or advisor to better understand the investment choices in your plan, contact us at 1-888-SYNOVUS (1-888-796-6887).
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This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.Diversification is no guarantee against market loss.
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