When you are a young professional, it might be difficult to wrap your mind around your retirement; however, the choices you make now are important in determining your financial future. The earlier you start saving for retirement, the more wealth you can accumulate.
So, what exactly is a 401(k)? Originating with The Revenue Act of 1978, the program was implemented to increase Americans’ savings. A 401(k) plan is an employer-sponsored retirement savings plan designed to offer tax benefits for employees. Many employers offer to match the employees’ contributions (usually a certain percentage, such as 4%). The IRS does place limits on contributions each year; in 2024, it was up to $23,000 for individuals under 50.
An executive order signed in August 2025 was designed to make it easier for individuals with a 401(k) to invest in alternative assets, such as cryptocurrency, private equity, and real estate. However, this change is still dependent on further regulatory measures. In the future, employers and employees alike will need to carefully weigh potential benefits and risks associated with these alternative assets.
That said, 401(k) plans are very common and are instrumental to Americans today. Currently, most American employers offer 401(k) plans – especially larger companies – and the trend is only going up.
Read on to complete your Beginner’s Field Guide to 401(k) plans!
Traditional vs. Roth IRA Accounts
Traditional:
- Choose whether you expect to be in a lower tax bracket than you are now.
- You’ll be taxed on all withdrawals. You must take Required Minimum Deductions by April 1 of the year after you turn 73 years old.
Roth IRA:
- A good option if you think you’ll be in a higher tax bracket during retirement.
- You can withdraw your contributions at any time without penalty (provided your account has been open for a minimum of 5 years and you are at least 59 ½ years old). Roth accounts don’t have Required Minimum Deductions.
- Any withdrawals would not be taxed.
General 401(k) Tips
- Always take advantage of the employer match.
- Set a goal to save 15% to 20% of your pre-tax income.
- Some companies have a vesting schedule in which you may need to work for a certain period before you can fully claim the matched funds.
- Diversify your investments across different asset classes, such as stocks or bonds, then diversify those by investing in small and large companies, domestic and international companies.
- If you are a young professional, you can afford to risk a little more. Consider investing a higher allocation to stocks. As you age, you can be more conservative.
- Be cautious about early withdrawals. Typically, the IRS imposes a 10% penalty on funds withdrawn before age 59 ½.
- Any 401(k) withdrawals may be subject to income taxes and early withdrawal penalties.
Make sure to take advantage of early investing so that you can reap the benefits in your retirement years. Staying the course – while being open to diversification and some risk-taking – can pay off for you in the long run.
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As a member of Nusenda Credit Union, you have access to complimentary investment consultations with our CFS Investment Services Registered Representatives. To book your complimentary consultation, call us at (505) 872-5420.