I’m 25 years old and make $35,000.
How should I start contributing to my 401k?
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Great question 25! Over the last several weeks I have helped many 401k participants answer this question.
Three factors go into finding a good answer.
- Does your employer have a match?
- Does your plan have a ROTH option?
- What is your tax bracket?
You should at least contribute an amount that will allow you to get all of the employers match. If your unsure you can usually call your human resources person or department.
The standard 401k contribution is a contribution from your paycheck and you get a tax deduction for the contribution. Don’t get to excited because you are simply deferring the tax and the tax calculation until you withdraw the money in retirement.
The ROTH contribution is an after tax contribution and you do not get a current deduction for contributing. However, there is not tax on the growth and no tax on the withdraw at retirement.
Which one is better depends on your current tax bracket. If you are in a low tax bracket you may find the ROTH to be a better selection. If you have a higher tax bracket the standard 401k contribution would save you current taxes.
This simple answer can turn a littler complex. Let me know if you need more information. Your company should have a financial advisor who works with the plan and can answer many of the these questions with very accurate details.
Remember, any contribution you make to any retirement plan will have withdraw restrictions and penalties until retirement age which is 59 1/2. Always consult a CPA for tax advice.
I hope my answer helps.
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