Your Guide to Setting up a 401(k) Retirement Account

When most people think of saving for retirement, they think that they can start later in their lives and be fine. People in their 20s and 30s often do not believe that saving for retirement is a priority. This mentality can be extremely damaging, however, because so many adults end up close to retirement age with very little retirement money put away. It is never too early to start saving for your retirement. In fact, the sooner you start, the better off you will be by the time you do retire. Setting up a 401(k) account is a fantastic way to get started with saving, and the earlier you do this, the more time your money will have to grow while it is in that account. To learn more about how to set up a 401(k) account, continue reading.

What is a 401(k)?

To begin, it is important that you have a good understanding of what a 401(k) plan is. A 401(k) is an optional retirement account arrangement offered by certain companies that allows you (as an employee of that company) to have a certain percentage of your income “deferred” or transferred into a retirement account. A 401(k) plan is known as a qualified plan, which means that it is regulated by the federal government. You should also keep in mind that most plans offer various benefits including the potential to earn an employer contribution and tax-deferred benefits as well. Because a 401(k) is an employer-sponsored account, it is important that you speak with your employer to determine whether they offer a 401(k), and to discover what the terms of that account are including if they offer employer-matching contributions. If the company does provide a contribution match, that means that they will contribute a certain amount of money to your account based on the amount that you personally contribute. If you discover that your company does not offer a 401(k), or you are self-employed and do not have access to a 401(k) account, you must look into other options such as an Individual Retirement Account (IRA) or an alternative savings account so that you can still get started on saving money for retirement. Related Article: How much money should I save?

Setting up Your 401(k)

In a lot of situations, as soon as you are hired to a company that offers a 401(k) plan, you will be added to the plan. Some employers will automatically enroll new employees and have certain default options already set in place, while other companies will require you to personally sign up for the plan. That leads us to our first step:

1. Sign up: Speak with your HR department to get your 401(k) account initially set up. This process is generally quite simple as you will just need to provide basic information and determine what your 401(k)-contribution amount will be. Then, the HR department will pass the rest of the process over to the company’s 401(k) plan administrator to handle the rest of the details for getting your account set up.
2. Choose an account type: You will also need to determine what type of 401(k) account you would like to have, if your company offers you different options. In most cases, the 401(k) accounts offered will be traditional 401(k)s, although some employers offer a Roth 401(k) option as well. Essentially, the difference between those two accounts are the tax benefits offered:

• Traditional 401(k) account contributions are made with pre-taxed dollars, meaning that you get an immediate tax break, although you will need to pay taxes later when you start making withdrawals.
• Roth 401(k) account contributions are made with post-tax dollars, so you do not get an immediate tax break, although qualifying withdrawals made later are tax-free.

You also have the option of opening both a traditional and Roth 401(k) account if you desire. Speak with your HR department or a representative with the company’s 401(k) plan administrator to get the accounts that you want set up.

3. Review the investment options and fees: A 401(k) account holds your money and invests it into certain investment accounts that you can include in your portfolio. Therefore, it is important to determine what specific investment options you want included in your plan as soon as you get your 401(k) set up. Typically, your employer will choose default options originally, and you can change the investments if you want to. You will usually have a variety of different options to choose from.

The exact investments you may choose will vary depending on what your company and the specific plan offers and how risky you want the investing to be. It is usually recommended that you diversify as much as possible, meaning that you invest into a mix of different stock funds and bonds that fit into your personal risk tolerance. When you are young, investing into high-risk options is more acceptable because you have more time to recover if your portfolio loses money. Next, it is crucial that you review the investment fees (also called “expense ratios” or “management fees”). These fees are associated with certain investments, and it is highly advised to stick with mutual funds that charge less than 1 percent in fees. Also, pay attention to the plan administrative fees that are charged and paid to the financial company that runs your company’s 401(k). Although you do not have much control over these fees, it is still important to understand how much is going to be deducted from your account.

4. Review the employer match: Many companies offer an employer match where they match a certain percentage of your contributions, up to a limit. Become familiar with what requirements are set in place for you to meet before your employer will begin contributing to your account. Generally, you must have worked at the company for a certain period of time (this is commonly referred to as the “vesting period”) and you must contribute a certain amount before the contributions start.

Employer matching is essentially free money, so it is important that you do whatever you can to ensure you are able to take advantage of having the funds added to your account. Every little bit helps, and it can end up making a big impact on the amount of money you have in your account when it is time to retire.

5. Start contributing: The sooner you start contributing to your 401(k), the better off you will be. It is never too early to start putting money into your retirement.

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By Admin – February 2019