Retirement Bucket #1: Contributing to a 401(K) Plan

Once you are paid your salary, the money should flow to the Retirement Bucket #1. This means that, if your employer offers a 401 (K) plan, you are going to contribute a portion of your salary to that plan.

Your contribution to a 401(K) plan is deducted from your paycheck before taxes and invested at your direction in any of the investment options (stocks, mutual funds, etc.) offered by the plan.

Your 401 (K) funds will grow tax free until you start withdrawing them. You can withdraw funds from your 401 (K) without paying a 10% penalty after you turn 59 ½.

Another great feature of 401 (K) plans is that employers usually match your contribution, partially or in full.

Let’s say that you make $50,000 / year and you contribute $15,500 (the maximum allowed in 2008) with your employer matching 50%. This means that you will get $7,750 free money from your employer, and the $23,300 (your contribution plus your employer’s match) will grow tax free year over year.

For more information on how 401(K) plans work visit these links:

How does a 401(K) plan work?

All about 401 (K) by The Motley Fool