If you’ve been recently asking for retirement planning help from financial planners, you must have heard them telling about a three-legged stool for funding retirement which comprise of employer benefits, government benefits and personal savings. Now as the future of Social Security is in severe doubt and there are high chances of pension plans also becoming extinct, it is indeed a good idea to depend entirely on your personal resources as much as you can. One of the most popular and effective ways of saving towards your own retirement is through a 401(k) employer-sponsored plan. If you make the mistake of not participating in this, you’re actually missing a golden opportunity of lowering your tax burden and increasing your future savings.

401(k) accounts – Some features offered by such plans

Are you still wondering, ‘what is 401(k)’ and why there is so much buzz about this among everyone who is employed? Well, then check out some features offered by such 401(k) plans.

• Matched contributions: There are many employers who will match a certain portion of your savings and pass you free money. The most common matching amount might be 50% of the initial 6% of your income that you save. For instance, if you have a yearly salary of $35,000 and you initially contribute 6% of that amount which is equal to $2100, you would receive its 50% which is $1050 as matched contributions from the employer’s behalf. But hey, don’t make the mistake of not contributing if you don’t get a matched contribution.
• Earnings that are tax free: As soon as you start contributing a portion of your pay to this account, you start owing less to the IRS. The contributions come out straight from your pay before the taxes are deducted and hence your tax bills are lowered. This way you defer income tax on the 401(k) savings. Nevertheless, you need to have a clear idea on the 401(k) limits 2016 before deciding on the amount of contribution.
• Borrow loans: There are even many 401(k) plans which allow the user to borrow money from that account for reasons like purchasing a primary home, paying for medical bills or student loans. The loan needs to be repaid within 5 years with interest rates and as long as you’re employed with them, you can repay the amount without incurring tax liabilities.

Making the most out of your 401(k) account

Let’s take a quick look at the best ways in which you can reap the best benefit out of your 401(k) accounts.

• Consistently maintain your 401(k): The key to becoming ready for retirement is understanding and also maintaining your 401(k) account. Keep a close watch on your investments and ensure capturing matched contributions from your employer. Rebalance your investment portfolio regularly as these are some steps to take towards your retirement.
• Save for as long as you can: If you are aware of the might power of compounding interest rates, you would know the importance of saving right away. Irrespective of whether you’re 22 or 52, poor or rich, just working to get through or employed at your best job, start off by participating in the 401(k) plan as soon as you’re eligible. You may even use a 401(k) calculator to help yourself with any vital calculations.
• Draw the most out of your company match: Check with the HR department to know whether or not your employer offers any matched contributions. If you see he does, make sure you’re contributing enough money so that you can draw the most out of the matched contributions. If you don’t, you’ll just be leaving free money left on your table.
• Be a watchful & smart investor: Ensure that you choose wisely from the offering of your 401(k) plan. Avert investing in single-stock investments and rather opt for mutual funds which are more preferred due to its diversification and professional management. Whenever you can, look for high quality funds.
• Know the contribution limits for 2016: Are you aware of the 401(k) limits? Since they are tax-deferred savings plan, they usually have a maximum contribution amount which is set by the IRS every year. Hence, before you take the plunge into saving, you should first know how much you can save in this account. In the year 2016, the maximum annual contribution for employees less than 50 years of age is $18,000 and for people at 50 or above 50, it’s $24,000. So, make sure your saved amount is within the 401(k) contribution limits.

Therefore, if you wish to spend a debt free retirement where you can travel around the world with your spouse and grandchildren, you have to take cautious financial steps from the time you start earning money. Follow the above mentioned tips to retire debt-free.