Opening Your First 401(K)

Opening Your First 401(K)
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Learn how to open your first 401k and get on the path to retirement savings early.

• Money & Finances: How-To • Money & Finances: Retirement • Money & Finances: Saving • Money & Finances: Taxes & IRS • Money & Finances: Tips & Tricks

When you start your first job, you’ll probably have a pile of paperwork to fill out, and part will be information about enrolling in a 401(k). These 401k's are the primary investment programs which help you save for retirement.

In this type of investment plan, you will determine a certain amount from each paycheck that will be invested in bonds, stocks, and money market funds. The money is deducted from your check before taxes are paid on it. The money accumulates in the investment account, and you will receive updates from the 401(k)'s administrator to let you know how your account is performing. Six months after your 59th birthday, you can begin taking money out of the account. This is to help you begin to pay for your life after retirement.

Here a few advantages to opening a 401(k):

  • Because all of the contributions are deducted before you pay taxes, you will be receiving a tax break immediately.

  • You don't have to pay any money on this account as the amount grows. You pay no taxes until you begin to withdraw it.

  • In the event of a lawsuit or problems with creditors, 401(k) plans are shielded.

  • Many times, employers match 401(k) contributions which is essentially free money for you.

As with all plans, there are also disadvantages:

  • You can only participate in the investments your employer offers.

  • You will have to begin paying taxes on the money as income when you begin to withdraw it.

  • If you withdraw before you turn 59 you have to start paying taxes on it as income as well as federal (and sometimes state) penalties for early withdrawal of 10 percent.

US News has determined that you should usually save at least 12 percent of the money you make throughout your career for retirement. This will vary depending on a few factors such as: When you plan to retire, times in your career when you're without a job, and how much your retirement lifestyle will cost.

Right now the regulations limit the contributions you can make to your 401(k) and the exact amount tends to change every few years. These limits only include your portion, not what your employer pays. Check your paperwork to see if your employer limits what you can contribute to a certain percentage of your salary.

It is a good idea to invest as much of your salary that your employer is willing to match, even if the investments offered aren’t those you particularly like. Each time you receive a raise, make sure your contributions to your 401(k) increases.

You will have an assortment of options to choose from for investment through your 401(k) plan. Generally, the selection includes bond mutual funds, stock mutual funds, and money mutual funds. Vary your choices in case there is a shock to a particular market and to assure steady returns. Here are a few tips for choosing:

  • Stocks typically offer better long-term growth than other types of investments.

  • An index fund, which invests evenly across the stocks in an index, pays a return equivalent to the market's average with lower management funds. Over time, index funds typically offer good returns.