Starting a 401k plan

A 401k plan has many advantages. It adds a bit of complexity to your financial life, but that’s a small price to pay all its advantages. Here’s how to get started. First, decide how much you want to contribute. Ask your employer for the paperwork to start making contributions.

Many employers offer a choice of either a Roth 401k or a regular 401. In a Roth, you pay taxes on your earnings before you make the contribution, but you can withdraw the money tax free. The regular 401k is just the opposite: the money you put in does not count as taxable income, but the money you take out will be taxed as ordinary income. It usually does not make a big difference which you do, unless you expect your future tax bracket to be a lot bigger or smaller than your current tax bracket. If you’re expecting a higher tax rate in the future, go with the Roth.

You can start with a significant contribution of, for example, six percent. However, if your budget is really tight, here’s what you do. Start with just one or two percent of your pay going into your 401k. Then the next time you get a raise, use the raise to bump up your 401k contribution percentage. In a few years, you are likely to be up to six percent.

As you get started, you’ll need to decide which investments you want to put your money into. A good beginning for most people just starting out is a mutual fund that invests in United States stocks. Scan the information from your employer for your particular choices, and one of them should be for U.S. stocks. As you build up more money, take sometime to learn about other investment choices, including international funds. As you get older, you’ll probably want to add bonding to your portfolio. However, don’t let fear of making the wrong choice keep you from getting started. A less-than-perfect investment choice is better than doing nothing at all.

The third major decision area you can defer for a while-how to take your money out. And yes, you will have some choices to make here as well. The most important thing about saving and investing for your retirement is to get going. People who start early, even if they make some minor mistakes, are far better off than people who dither for years while they try to make the perfect decisions.