If your employer offers a retirement plan, then taking advantage of that plan is essential toward building wealth. Many companies are now offering what is called 401(k) plans which is an IRS code for this type of retirement vehicle. Companies contribute a portion of their profits to these plans and allow you to put some of your money in tax free with an additional company match offered too. Quite frankly, there are few other ways to effectively build wealth as fast and as securely as a 401(k) plan.
If your new employer has a 401(k) or similar retirement plan, then one of the first things you want to do is sign up as soon as you are eligible to do so. Some companies will make you wait six months or one year before you can join up and then you are only fully vested after a certain period of time, usually three years. This means that not all of the money in your account contributed by the company belongs to you until you are fully vested.
Your employer will explain all of the details of your 401(k) plan before you must make the decision whether to enroll or not. The good news is this: more and more companies are automatically enrolling you so that if never contribute a penny you could get profit sharing of 3 or 4 percent of your salary added to your account per year.
In addition, most plans will allow you to contribute a certain percentage of your salary per pay period and that money will not be subject to federal government tax. This means if your plan allows you to contribute 10% and you choose the maximum amount, then your $50,000 salary is effectively reduced to $45,000 as far as the IRS is concerned. The less that you have, the less you’ll be taxed. Best of all, the “missing” $5,000 is fast at work in your interest earning retirement account.
It gets even better than that: many companies will match your earnings. For example if you kick in a dollar, the company will add in 50 cents up to a certain amount. So, for every dollar you earn, you get a 50% return, not including profit sharing. Do you know of any other place where you can earn 50% on your investment? Nothing legal, that is!
So, open up your retirement account as soon as possible and watch the funds flow in with your company match and profit sharing and your personal tax free contributions.
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