Most jobs in today’s market don’t include guaranteed pensions and retiree health care. Most have switched over to employee contribution strategies, also known as 401(k) plans, to save for retirement.
If you’re just starting out in the working world or are making a change to a new employer, you will likely be asked about contributing to a 401(k) plan.
A 401(k) is a retirement savings plan sponsored by an employer, which enables employees to save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.
The plans are named for the section of the U.S. tax code that governs them. They became popular in the 1980s as a way to supplement pension plans. As the expense of managing pension costs began to rise, employers began replacing them with 401(k) plans, according to the Wall Street Journal.
If your employer offers you a 401(k), there are some things to know to get the most out of your investment plan, according to Investopedia.
For most such plans, the maximum an employee can contribute is $19,000. If the employee is 50 or older, he or she can currently add $6,000 in catch-up contributions.
An employer also may give a choice of a regular 401(k) or a Roth 401(k). Roth has the same contribution limits, but it is funded with after-tax dollars, and it can be rolled into a Roth IRA at a later date.
Another important aspect of your 401(k) is the employer match. That means your employer will contribute the same amount of money you contribute or a percentage of that amount, effectively doubling your retirement savings without decreasing your salary or increasing your tax burden. Many employer matches kick in at 3 percent of your pay, so contribute at least that much if possible.
If you want to see how you stack up in your 401(k) savings, The Ladders has established target balances for different age groups, as seen below.