A 401(k) is a retirement plan sponsored by employers that allows employees to save money on a tax-advantaged basis, helping them prepare for retirement more effectively. Most 401(k) plans are offered to employees either when they start a new job or after a specific waiting period, such as 30 days after their first day of work. The process of enrolling in a 401(k) varies depending on the company: Some companies automatically enroll their employees, while others require employees to enroll themselves.
Here are the steps to set up your 401(k) and what you need to consider:
1. Enroll in the 401(k) plan
Some employers automatically enroll employees in their 401(k) plan at a set percentage of their salary. Others leave it up to new employees to enroll themselves either immediately or after a waiting period. You can enroll in a 401(k) at any time and adjust your contributions as needed.
To enroll, use your company’s benefits platform or contact your HR representative to find out the details of your 401(k) plan and enroll if necessary.
2. Choose a contribution amount
The annual contribution limit for 2024 is $23,000. You can start with any amount and adjust it later. Some plans allow for automatic increases in contributions each year.
3. Maximize employer match
Some employers match their employees’ contributions up to a certain percentage. Take advantage of this matching contribution if available. Be aware of any vesting period for the match.
4. Decide between traditional and Roth
Choose between a traditional 401(k) (pre-tax contributions) and a Roth 401(k) (after-tax contributions). Consider the tax advantages of each and how they align with your financial goals.
5. Select investments
Choose your investments wisely based on your risk tolerance and investment goals. Consider diversifying your portfolio with a mix of funds.
6. Consider fees
Be aware of the fees associated with your investments, including expense ratios and management fees. Compare fees and performance to make informed decisions.
Conclusion
Setting up your 401(k) is an important step towards securing your financial future. Take the time to understand your options, make informed decisions, and regularly review your account to ensure it aligns with your goals.
— This article was updated with contributions from Bankrate’s Logan Moore.
Editorial Disclaimer: It is recommended that investors conduct their own research before making investment decisions. Past performance is not indicative of future results.