What is a 401k? How to join a 401(k). Risks and rewards.
So, what is a 401(k)? Well, it's a retirement savings plan offered by many employers in the United States. It's named after a section of the tax code—hence the not-so-creative name! The main idea is to help you save for retirement by setting aside a portion of your paycheck before taxes are taken out. This can be a great way to build up a nest egg over time.
One of the biggest benefits of a 401(k) is the potential for employer matching. This means that for every dollar you contribute to your 401(k), your employer might contribute an additional amount, often up to a certain percentage of your salary. Think of it as free money—it's a fantastic way to boost your retirement savings without any extra effort on your part.
Another benefit is the tax advantage. Because your contributions are made pre-tax, they reduce your taxable income for the year. This means you might pay less in taxes now, which can be helpful, especially when you're starting out and every dollar counts. Additionally, the money in your 401(k) grows tax-deferred, which means you won't pay taxes on your earnings until you withdraw the money in retirement.
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