A k is a retirement investment account offered by your employer. It is what's known as a "tax-advantaged" investment account: The money you contribute to it each year, typically a percentage of each paycheck, lowers your taxable income. That tax break is meant to encourage you to save for retirement now. There is also a Roth k , which is offered by fewer employers than a traditional account. You contribute money that's already been taxed; then, when you withdraw money in retirement, you do not pay taxes.
For more on the difference between a traditional and Roth k , read this article. Like a savings account or individual retirement account IRA , a k itself is simply a type of financial account.
Once you contribute money to your k , you must then invest the money in stock or bond funds, otherwise it will remain as cash. While you sign up for your k through the company you work for, it is typically managed by a separate financial firm, such as Vanguard, Fidelity, Principal, Schwab, etc. This is the company you will receive important information and disclosures from about your account and investments. If you leave your employer, in most cases your account will remain at the financial firm that originally managed it, unless you roll it over to a new company or have contributed little to it.
You can also take a k loan, which needs to be repaid, including interest. Learn more about that here. Not every employer offers employees a k. If that's the case, you can open an IRA, which also offers tax advantages for those investing for retirement, on your own through a brokerage firm. Here are two scenarios that illustrate why it's so advantageous to start early :. Companies often offer a match on contributions up to a certain dollar amount or percentage the average employer k match is 4.
Financial experts advise contributing at least up to the employer match threshold. Otherwise, you are leaving money on the table that your employer owes you as part of your total compensation.
All investing is risky and returns are never guaranteed, but it can actually be more risky to keep too much of your savings in cash, thanks to inflation. Still, you don't want to go all in on one stock or investment, particularly if a rocky market makes you uneasy and anxious, or likely to do something drastic, like pull your money out of your account.
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The information on this site does not modify any insurance policy terms in any way. A k retirement plan is one of the most popular ways to save money for retirement and score some tax breaks for doing so. When experts speak of being aggressive, they generally mean how much of your assets are in stocks or stock funds.
Stocks are an attractive long-term investment, but they fluctuate a lot in the short term. While being more aggressive can make a lot of sense if you have a long time until retirement, it can really sink you financially if you need the money in less than five years. We have a risk tolerance quiz here. Stock funds are divided into categories. Your k will probably offer at least one fund in each of the following categories: U. If you have access to an international bond fund, you might put a bit of your savings in there to diversify globally.
Expense ratios are the fees carried by investments, and they range widely. You might find your k offers only one choice in some of the above categories, but when you have a selection, you should generally pick the lowest-cost option — often an index fund. Even small differences in fees can have a huge effect over time. One is a target date fund, available in virtually all k s. These funds have a year in their names, designed to correspond to the year you plan to retire. You put all of your k money in this fund, which diversifies for you and automatically takes less risk as you approach that year.
Another option, which may be superior to a target-date fund, is a robo-advisor or an online planning service. Some of these companies, like Blooom, manage your k at your existing provider, setting your asset allocation and automatically rebalancing.
Online planning services, including many of the ones on our list of best financial advisors , offer low-cost access to human advisors and provide comprehensive guidance on your finances, including how to invest your k. Crystal could buy and sell shares of her funds until they reached the desired asset percentage combination. This is because asset allocation is the major determinant of risk and return for a given portfolio.
There are volumes written about the benefits of portfolio asset allocation and rebalancing. When and how you change your k mix on a short-term basis is less important than remembering to check in on your investments each year and getting them back in line with your initial preferences. Article By. The Human Interest Team. We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a k to your employees.
Human Interest offers a low-cost k with automated administration, built-in investment advising, and integration with leading payroll providers. Our newsletter delivers succinct and timely tips, reviewed by Financial Advisors, to help you navigate the path to financial independence.
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