Stephanie Daniels, Features Editor
Every year, thousands of young adults are hired. During that hiring process, they are presented a package including a 401(k) offering. Many of them sign up for a 401(k) as part of the on-boarding process, but do they know the implications? Often, they are left to their own devices when determining its advantages and disadvantages, leaving many things unclear.
You probably have been in the same situation or know someone who has. What are your choices? What are the pros? Cons? How beneficial is a 401(k) anyway? There are many questions to be asked about your money, especially when it comes to saving it. I’m going to leave you with information that will help you make that hard decision whether to contribute to that good old 401(k).
Many companies offer a 401(k) as part of their benefits package. But what is a 401(k)? A 401(k) is a retirement savings plan often sponsored by a company that allows its employees to save for their retirement. This means you’ll have money for your future! And, can spend less time trying to figure out how to save and pay for those good old student loans. Often, employers will “match” an employee’s contribution up to a certain percentage. For example, you may contribute 4 percent of your paycheck to your 401(k), and your company may offer a match up to 3 percent. This means the company will “match” dollar-for-dollar the amount you put into your 401(k) up to 3 percent providing you with a 7 percent contribution.
“Matching” can be a great advantage to many people, and is a sound and smart way to save more money. Daniel Leible, Financial Representative at Northwestern Mutual, advises “Not to invest more than what is matched by your company.” Reason being, what the company gives you works as free money. In addition to your contribution from each paycheck, most companies will add to that pot often doubling what you would’ve had as a contribution alone. Because of this, Leible encourages employees to take advantage of that match to get the most of your contribution, while saving yourself a few dollars each paycheck.
Now you understand what a 401(k) is, and how investing in it works, but what about the stipulations? 401(k)’s are broken commonly into two types, traditional and Roth. With a traditional 401(k), you aren’t taxed when contributing (when it is taken out of your paycheck) or while it is being accrued, but will be taxed 15 percent when you take it out. When you turn 59 ½, you are at the qualifying age to start withdrawing from your 401(k). On the other hand, a Roth individual retirement account taxes you when you contribute, but doesn’t tax when being accrued or when it is taken out. And like the traditional 401(k), it requires that you are 59 ½ to start withdrawing.
You’re probably wondering, what if I have a life emergency? Can I withdraw from the thousands of dollars I have saved over my career? The answer is yes, but not without cost. With both types of 401(k)’s, you can access your funds early, but will have to pay the money back with interest. Something that didn’t sit well with 40-year-old waiter Courtney Terrell.
“It’s my money, and I shouldn’t have to pay a penalty, and certainly shouldn’t have to pay it back with interest,” he said. Terrell has been in the work industry for several decades, and explained that a 401(k) is something that he feels could really benefit him, especially as he gets older, despite its stipulations. Further mentioning that about 40 to 50 percent of people he knows around his age contribute to a 401(k). But when asked about the contributions of those young adults starting to break into the workforce, one thing that he wishes is that there was more knowledge for them.
Charles Lee, a 21-year-old Amazon driver, agreed, stating that of the people he knows around his age, only one contributes to a 401(k). The reason in his eyes, in agreement with Terrell’s: education and resources. In his experience, young adults are more apt to opt out of 401(k) contribution because they aren’t aware of its benefits. Often, people in their youth look at the money they would contribute as income that they can use now, rather than looking to use it toward the future. Presently, he like Terrell doesn’t have a 401(k), but stated that once he learned that it was something he could take with him from job to job, he was on board. His education about 401(k) funds was a vital catalyst in his participation.
Is a 401(k) a good choice? If you are looking to supplement your income for retirement and plan for your future, it is a great idea! It acts as a piggy bank that is often filled not only by your contributions, but your employer’s as well. Although it can come with stipulations, such as taxes and penalties when taking it out early for emergencies, there are ways to alleviate some of this with other options such as a Roth 401(k) instead (which offers a 10 percent penalty instead of 15). Clearly, the conversation around 401(k) will continue to be one in which both older and younger people can benefit from. Whether you are a college student just starting out, or a middle-aged adult looking to start saving, a 401(k) may not be a bad idea for your financial future.