The More You Know: 7 Essential Steps To Set Up Your 401(k)



May 2 2024, Published 8:10 a.m. ET

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Planning for retirement can feel intimidating, but setting up your 401(k) can be simple. In this article, we’ll walk you through seven steps to set up your 401(k), ensuring you’re on the path to a secure financial future.

What Is A 401(k)?

A 401(k) is a retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck before taxes are deducted. This consistent savings method is considered essential for retirement. There are typically two different types of 401(k) plans.

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Traditional: A traditional 401(k) is a retirement savings plan offered by employers. Under this plan, employees can contribute pre-tax dollars from their paychecks, which are then invested in various funds. Once you withdraw money, you’ll have to pay tax on the contributions and earnings.

Roth: A Roth 401(k) is a retirement savings plan similar to a traditional 401(k), but contributions are made with after-tax dollars. Withdrawals in retirement, including any investment earnings, are tax-free as long as certain conditions are met.

Is A 401(k) Worth It?

Setting up a 401(k) isn’t only about saving for retirement — it’s like planting a money tree that grows while you chill! With a 401(k), you stash away cash from your paycheck before taxes. Think of it as giving Uncle Sam the slip while building your future fortune. Plus, many employers match contributions, which is similar to free money. While you’re living your best life, your 401(k) is doing the hustle in the background, setting you up for some financial fun down the road.

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Steps For Setting Up A 401(k)

Now that you have a clear understanding of the 401(k) and its potential perks for your retirement, it’s time to take action. Dive into the steps below to set up your own plan.

1.Get the scoop: First, determine whether your employer offers a 401(k) plan. Begin by reaching out to your Human Resources department.

Employers may offer 401(k) matches as an additional benefit to attract and retain employees and to promote retirement savings. Besides matches, employers might opt for non-matching contributions, such as profit-sharing, to your 401(k), regardless of your contributions.

2.Sign up: If your employer offers a 401(k) benefit, enroll in the plan through your HR department or online portal.

3.Choose your contribution: Decide how much of your paycheck you want to contribute to your 401(k). While everyone’s financial circumstances will vary, experts suggest investing as much as possible to utilize an employer matching program.

“Try to invest as much as you can in your 401(k) comfortably,” Shinobu Hindert, a certified financial planner and author of the book “Investing Is Your Superpower,” told U.S. News and World Report. “A rule of thumb is to contribute 15% of your current income. Start with a percentage you’re comfortable with, and put a reminder on your calendar every three months to see if you can increase these contributions by 1% to 3%.”

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4.Select investments: Pick the investment options that best suit your retirement goals.

5.Maximize employer match: Don’t leave money on the table. Contribute enough to get the full employer match if available. Of course, experts say it’s understandable that only some are in a position to reap the full benefit, and that is fine. Do what you can.

“While we encourage you not to leave money on the table, we understand everyone has their own personal situation,” said Mike Shamrell, vice president of Thought Leadership at Fidelity.

6. Review on a regular basis: It’s important to monitor your investments and make adjustments as needed. This includes adjusting your contributions should your financial situation change, such as a loss of income.

7. Celebrate your future: Now, pat yourself on the back for taking a big step towards a secure retirement.

As you follow these steps to set up your 401(k), you’re not only securing your financial future – you’re taking control of it. Remember that every decision you make now is an investment in the life you want in retirement. Embrace your future with confidence and determination.

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By: Truth Hawkins

Truth Hawkins, a seasoned wordsmith with over a decade of experience spanning entertainment, culture, and lifestyle news, navigates the dynamic landscapes of pop culture, lifestyle, and music. More than a reporter, Truth is a dedicated storyteller, unearthing narratives that deeply resonate with readers and invites them to engage in meaningful conversations.

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