Should I Open a 401(K)?

May 4, 2016 | Blog, Retirement

When it comes to retirement planning, there is a myriad of investment choices, and it can become incredibly puzzling when you’re trying to choose the right ones. One of the most popular investment options for retirement is a 401(k), so you’ve probably asked “should I open a 401(K)?” when reviewing all these options.

If you’re considering opening this account, we’ve come up with three points that may help you determine if a 401(k) is right for you:

Tax-free growth

This is one of most appealing draws of a 401(k). The money you invest in your account isn’t taxed, and most importantly, its growth while invested isn’t taxed – meaning your money has a better ability to grow. The wealth invested in this account is taxed when you withdraw it as income, but it may be taxed at a lower bracket (because you have less income in retirement).

Early withdrawal penalties

An important consideration is that may encounter steep penalties if you withdraw this money before retirement age (which is defined as 59.5 years old when it comes to this account). If you treat your 401(k) like a loan, you’re required to make payments every 90 days. If you don’t do this, that money will be considered a distribution and will not only be taxed as income, but you’ll encounter a nasty 10% penalty.

So when you ask yourself “should I open a 401(k)?” the answer should be a resounding “no” if you’ll need to use that money before retirement.

Employer match

If your employer offers a match on a 401(k), you’re essentially receiving free money when you invest in this account. Although these matches vary (and aren’t mandatory), employers will generally match up to 3-6% of your salary if it’s invested in a 401(k). For example, if 6% of your salary was $3,000, and you put that money in a 401(k), your employer would also contribute $3,000 in.

When you ponder “should I open a 401(k)”, an employee match should strongly sway you towards saying “yes” – it can make your investment far more powerful and boost your returns.

Have any more retirement questions

At LexION Capital, our fiduciary advisors work individually with clients to craft investment portfolios that meet their unique retirement goals. We can answer questions like “should I open a 401(k)” to ensue your golden years are financially successful.

Don’t hesitate to reach out to us today to see if our retirement services might be right for you.

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