What You Might Not Know About Your 401(k)

Do you know as much as you should about your 401(k) account? Many people who think they have all the facts about retirement planning and saving via a 401(k) are surprised to learn some basic truths about these kinds of accounts.  

Costs: Have you ever wondered how your company's 401(k) provider makes money for managing its clients' retirement programs? If you think that are no costs associated with administering a 401(k), you need to think again. There are fees associated with 401(k) accounts, some or all of which may be paid by the company or may be passed on to plan participants. The amount a company has to pay for its 401(k) is dependent on a variety of factors. Small companies often pay more than larger companies, because they have a smaller asset base. Many companies do pay these costs, which employees should take into consideration when thinking about the total benefits program providing by the organization.

Max Out Matching Funds: If you're employer matches your 401(k) contribution up to a certain amount or percentage of your salary, failing to take full advantage is a foolish decision. When employers provide matching funds for 401(k), if you don't participate up to the maximum of the matching opportunity, you're guilty of walking away from free money. Nobody wants to do that. Since the money goes into your 401(k) pre-tax, getting a company match is like getting a tax deferred raise that has the potential to increase significantly over time.

Truth About Tax Deferred: Don't lose sight of the fact that the money you put into your 401(k) goes into the account pre-tax. However, there's a big difference between tax deferred and tax free. When you choose to start taking distributions from your 401(k) account, you'll pay income tax on the full value of the account, not just the capital gains or interest earnings. The idea, of course, is that you'll save tax dollars in the long run, because you'll be in a lower tax bracket after retirement than you're in during the height of your career.

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