Clear glass jar labeled 401K with money and coins in it. J

What is a 401K & How Can I Take Advantage of It?

As you grow up from your teenage years, a foreign word you’ll likely be given wrapped as advice by other adults is “get a 401K”. To be fair, this particular advice does merit attention at the earliest possible time. However, what it doesn’t come with, sadly, is advice on how you can take advantage of such product, so to speak. Here is an in-depth guide to a 401K plan.

401K Defined

In a nutshell, 401Ks are retirement savings accounts enabling employees to save more over their active lifetime. It is traditionally sponsored by employers wherein employees save and invest a portion of their paycheck pre-tax. The amount to be deducted is chosen by the employee himself/herself but must be within the maximum allowed amount. 401Ks for self-employed individuals have become increasingly popular nowadays due to the surge of self-employed and home-based professionals.

401K is named after the section of the tax code that oversees it. It emerged around the 1980s as a supplementary product to pension funds. The latter were also managed by respective employers and generated a stead income stream over the employee’s retirement lifespan. However, over time, the costs of managing pension funds rose up, which had employers fleeing to cheaper alternatives hence 401Ks.

Strengthening Your 401K Plan

Inquire if your employer’s 401K plan has a favorable contribution matching structure. This is basically free cash that you shouldn’t pass up on. Contribute a certain amount of cash per month that qualifies you for a per-dollar match, meaning your employer will contribute $1 for every $1 you put into the 401K account. In addition, check how your employer is offering the matched contributions as there are several ways they can do so, such as shares of company stock.

Investment diversification is also an advice that cannot be overemphasized. People who have large sized accounts should diversify their portfolio to different asset classes to maximize growth and minimize inherent risk. Those with smaller funds to invest should start off with only few asset classes as diversification is less effective in limited scale. You’ll end up paying too much for brokerage fees and other services involved in managing the investments.

Take Full Advantage of Your 401K

Taking advantage of your 401K plan means learning all you can about the product and avoiding premature withdrawals from the account. This also entails proper money management to ensure that monthly deductions for your 401K plan does not restrict you from living an adequate and happy lifestyle.

David Milberg is an experienced investor in NYC.

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