Understanding Your 401k Options
When it comes to planning for your future, retirement funds and options are a big part of your success later in life. The earlier you start planning for retirement, the more options you will have once that time comes. You can choose to invest in retirement accounts, like 401(k)s or IRAs, or more nontraditional ways, like independent stocks and real estate options. To protect your asses the most, look at diversifying your funds into many investment avenues inside either an IRA or 401(k) account. When looking into different investment options, you can look at more safe options, such as CDs, mutual funds, bonds, and precious metals. Depending on the market, stocks, cryptocurrency, and real estate can be financially lucrative options. However, these investments can be volatile and inconsistent. Having your funds in a variety of places can help protect your assets through market crashes and dips.
What is a 401(k)
These funds are made available through employers. Not all companies offer 401(k)s, but if they do, they are stable, safe places to keep your money. A portion of your paycheck will be contributed to the account before taxes. This means as you make money, you are only paying taxes on the portion of your income after the contribution. As you withdraw your retirement you will have to pay taxes on it then.
Some employers offer a matching contribution to whatever their employees put into their 401(k) every year. If your employer offers this benefit, it is a great idea to take them up on the matching contributions. The downside to a 401(k) is that there are typically penalties and fees for removing the funds before retirement age. This means that in the case of an emergency, you won’t have access to that money. Whereas if you were to invest in stocks you would have access to that money by selling it whenever you wanted. Check out https://www.irs.gov/retirement-plans/401k-plans to learn more about 401(k) plans.
Types of 401(k)s
There are two basic types of 401(k) options. The main difference between these two accounts is how the money is taxed. Depending on what you make and how much you expect to be worth at your time of retirement, one option may be better than the other.
Traditional: In a traditional 401(k) the amount is taxed as you withdraw the money from the account. This means you don’t have to pay taxes on that income as you earn it.
Roth: A Roth 401(k) has the opposite taxable income. You will pay taxes on the money as you contribute it, but do not have to pay taxes on the total amount you withdraw, including any earnings you receive while it is in the account.
The majority of people prefer the traditional 401(k) because most people assume they will be in a lower tax bracket after they stop receiving their regular income. However, those that foresee a higher tax bracket after retirement might opt for a Roth 401(k) to take advantage of a lower tax bracket when they are paying the taxes on the income. This means when they withdraw the money during retirement, they don’t have to pay taxes with that higher bracket. When withdrawing money from either a traditional or a Roth 401(k), early withdrawal is penalized. If you need to withdraw the amount before you are 60, you are taxed and penalized 10 percent. It is a good practice to set aside money for emergencies that is outside of your 401(k) to avoid the penalties of withdrawing earlier. Both have their benefits and downsides. It is important to do diligent research when choosing what account is right for your retirement. To help make the decision easier, here is a side-by-side comparison of traditional 401(k)s and Roth 401(k)s.
Investment Options
When it comes to investments, you never want to put all your eggs into one basket. If you invest in stocks and the market crashes, having a real estate or gold to rely on can be a huge benefit. It is important to diversify any investments to make. For this reason, more assets are being allowed in 401(k) accounts. In order to keep your investments diverse, think about investing in multiple avenues such as the ones below.
Stock Mutual Funds
These investments are in stocks that all fall under a common theme. For example, value stocks or stocks that provide dividends. You can also choose to invest in all the largest companies in America as your investment option.
Bond Mutual Funds
Bonds are payouts to governments or companies that are struggling. These typically have less risk involved because they offer a set amount with a fixed interest rate that will be paid back at a specific time. These options tend to be stable but offer little when it comes to higher rewards.
Precious Metal Funds
These are great options for diversifying your account. You can invest in mining companies with the idea that as the precious metal value increases, these companies will make you more money. You can also just buy physical gold with 401k by investing your original 401(k) into a gold IRA. Gold is a stable investment that has historically only risen in value. This makes investing in gold a safe, reliable option.
Cryptocurrency
With the advent of cryptocurrency, it has been a rollercoaster for investors. Investing in crypto isn’t necessarily a safe bet at the moment, but it has a lot of potential for high rewards. In the past five years, cryptocurrency’s worth has risen to unbelievable amounts. While the crypto market is volatile, it provides an investment that could end up being worth a lot in the long run. No matter what avenue you choose, planning for your retirement early is essential to setting yourself up for success later in life. Whether you are just starting in the workforce, or close to retirement, planning ahead has never been more important.
