This article originally appeared on The Life Currency.
A “401(k)” is one of those adult words that never really mattered before this period in our lives. I’m sure we’ve heard the term plenty of times but it didn’t really relate to us as we were too busy focusing on being non-adults. Now that we’ve embarked on this adulthood journey, a 401(k) is a term that we should be aware of and understand how it relates to our lives in particular.
By definition, a 401(k) is a “retirement account to which employee and employer contribute, on which taxes are deferred until withdrawal...” according to Merriam-Webster Dictionary. Essentially, a 401(k) plan is designed to help you adequately plan and save for retirement starting now rather than later. Each company is different when it comes to 401(k) plans to it’s important to explore the options your company has to offer.
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So how does this work you ask?
You have the ability to contribute a certain percentage of your salary that will go directly towards your 401(k). For example, if you want to contribute 5% of your $50,000 salary, $2,500 of your salary will go to your 401(k). Some companies will match your contribution up to a certain percent which is almost like free money (and who doesn’t love free money?!)
This means, if your company has agreed to match up to 4% of your salary, you’ll contribute $2,500 (5% of your salary) to the pot and your employer will contribute $2,000 (4% of your salary). You can always change how much you want to contribute to your 401(k) to ensure that you’re living within a budget that works for you.
“But wait, what if I want to contribute more? How much can I contribute?”
According to IRS.gov, the 401(k) contribution limit for 2017 is $18,000. This means, you cannot contribute more than $18,000 of your salary to your 401(k) plan. This probably won’t affect most young adults but it’s good information to be aware of. Note, the contribution limits are analyzed each year and can change for 2018. This is one of those adult things you’ll just have to keep up with.
Now, the question I’m sure you’re asking is “Well, what happens if I leave the company?” For starters, the money you’ve contributed is yours, all yours! So“What happens to the money my company contributed?” That honestly depends on your company. There’s no clear and concise answer here since each company is different in how they handle 401(k) plans. This is a question you’ll have to consult with your HR department about. That’s what they’re there for. Ask as many questions as you’d like.
In essence, a 401(k) plan is designed to help you retire comfortably in the future. While you earn money over the years, this plan is a hassle-free way to help you save money and ensure that you’ll have income once you retire. While retirement may seem like a long way from now, there’s no better time to start preparing than today.