A 401(k) is an employer-sponsored retirement plan that many people use as a way to start saving for their retirement. You can start saving when you are very young, when retirement is the last thing on your mind. It is good to start saving for your retirement early, that way you can work for many years without even thinking about retirement, and you will watch your fund grow larger. When people have a 401(k) plan through their employer, they put money in their account on a pre-tax basis. This means that the money that is taken from your paycheck before any of the taxes are withdrawn. This is great because the amount of money that you are getting taxed on decreases, meaning you will have a good amount of money for retirement, and you will be taxed less. The less money that is on your paycheck, the less amount you will be taxed on. One of the most important things to look at when looking at your 401(k) options is to see how you want to invest your money. These are called 401(k) funds, and there are a few different options to choose from.
There are many different funds for a person to choose from when looking at investment choices with your 401(k) plans. The most common ones are called money market funds, mutual funds, and stable value funds. People have funds so they have some control over how their money is invested. You want to make sure that your money is well invested because you will be able to make more money if it is invested correctly, giving you more money when you retire. However, if you know you are retiring soon, you should make sure to move your first two or three years of future withdraws in a safe investment option, that way you know you will have enough money when you retire, and you will not be scrambling to get your money.
A money market fund is a relatively safe choice when investing your 401(k) money. It is much like buying and selling stocks, but it is the buying and selling of money in the money markets. This may seem confusing, but it is similar to deposit accounts at the bank. Money market funds will take your money and invest it. Then, they will pay a portion of their earnings to you in the form of dividends. These funds are short-term, and they mature in less than 13 months. Some of the types of investments that are in money market funds may be in CD’s, or the US Treasury.
The next type of fund that you can invest your money in is called a mutual fund. This is the most common type of fund. When people have a mutual fund, they pool their money to buy investments, which are usually things like stocks, bonds, and cash. There are professional managers that handle the stock and bond picking, and at the end of each market day, the value of the fund’s investment pool is totaled and divided by the number of fund shares that are outstanding to determine each share’s daily value.
The last type of common fund is called a stable value fund. This fund mirrors that of a money market fund, where there is the buying and selling of money, like the stock market. This type of fund is low risk, but the return you get will be low as well. This is a type of investment where your funds retain the value of the amount you put in, regardless of what the stock or bond markets are doing. This type of bond is paired, or wrapped, with insurance contracts to guarantee a specific minimum return. The owner of the investment will continue to receive the interest rate that was agreed-upon, as well as the full principal no matter what happens to the state of the economy. You will not take much risk with this type of fund, but you may also not make a lot money off of them in the long run.
Investing your 401(k) money wisely can result in a lot more money for your retirement. Knowing what the different types of 401(k) funds are and how they work can help you decide which one is the best for you, especially when you are at different points of saving for your retirement.