Photo by Giorgio Trovato on Unsplash
You got your dream job with dream pay in the USA, now as the next step we immediately think about what car to buy or where should i buy a home? These are naturally the first set of questions that are very exciting to find answers to, BUT have you thought about enrolling into 401K? If you have not enrolled in your 401(k) account you are throwing away your money. Continue reading to understand why enrolling in 401K is one of your life’s important decisions next to marriage.
What is 401(k) and why was it Created?
The term “401(k)” refers to Section 401(k) of the Internal Revenue Code. The provision allows employees to avoid taxation on parts of their income if they elect to receive it as deferred compensation rather than as direct pay.
Free Money from your Employer – Retirement Bonus
Most of the companies now offer mouth watering contributions to your 401K account by matching part of your contribution to the account. According to the report from Fidelity employers on average contributed $4,020 to their individual employees 401K account.
This is a bit uncommon, but there are few employers that offer excellent perks & benefits who can also make elective contributions regardless of how much or little the employee contributes, up to certain limits. The general limit on total employer and employee contributions for 2020 is $57,000, or 100% of employee compensation (subject to a max of $285,000), whichever is lower. For workers aged 50 and up, the base limit is $63,500 ($57,000 plus the $6,500 catch-up contribution).
In 2021, the general limit on total employer and employee contributions is $58,000 and if you are age 50 and up, the base limit is $64,500, which includes the $6,500 catch-up amount.
Are you still on the edge on enrolling in 401K? Continue reading…
Tax Savings from Uncle Sam – IRS
All 401(k) contributions that you make are tax-deferred, meaning you don’t have to pay income taxes to the IRS for the money you contribute to your 401K account now at your current tax rate. For e.g. if your monthly paycheck is for $5,000 and you contribute $500 to 401(k) your employer will only withhold taxes for $4,500.
Still on the fence? Continue reading…
Tight on Cash? Borrow from your own 401(k) account and Pay Interest to yourself
You really like the house you looked to buy but slightly out of your budget? You can borrow up to 50,000 or 50% (whichever is less) from your 401(k) plan. Receiving a loan from your 401(k) is not a taxable event unless the loan limits and repayment rules are violated, and it has no impact on your credit rating. If you pay it back on time you may not have to pay taxes and penalties. To Know more, check this Link
Bonus Tip: Compounded returns
Once you have decided to contribute to 401(k) returns, please do review the prospectus to understand where do you want to invest your 401(k) retirement account in. There are funds you can invest in that offer aggressive growth to your retirement funds, $1,000 today will compound into >$10,000 by the time you retire. Choose your portfolios wisely, talk to your HR and also to the retirement account provider (Fidelity, Charles Schwab, T. Rowe Price)