Investing in 401k for beginners

Investing in 401k for beginners . Today we will talk about Investing in 401k and roth 401k for beginners.

401k is essentially a retirement savings account provided by your employer. Your employer will give you a benefits package and inside will have your 401k details. They will provide you the details to set one. Once you setup a 401k account, you fund it by adding percentages of your paycheck into that account. At that point you have the option of investing in a variety of assets (i.e. stocks, bonds, mutual funds). Over time, your money grows. Ideally, when you retire, you'll have a big stack of money that's been growing for years. And at retirement whatever money you have in there is your new income. Now we know the basics lets understand 401k even more.

Funding 401k account
There are two types of 401k, traditional 401k and Roth 401k.
The basic difference between a traditional and a Roth 401(k) is when you pay the taxes. With a traditional 401(k), you make contributions with pre-tax dollars, so you get a tax break up front, helping to lower your current income tax bill.
With a Roth 401(k), it's basically the reverse. You make your contributions with after-tax dollars, meaning there's no upfront tax deduction.
Each year you can choose to contribute money to your 401(k) plan through payroll deductions. These deductions are usually specified as a percentage of your income. Lets say you make $50,000 per year and you elect 5% of paycheck for 401k. You would be putting in $2500 per year. The annual contribution limit is $19,000 in 2019

Some employers will offer 401k matching. This is free money. Your employer say they will match 100% of your contribution on the first 5% of your salary you invest. So since you are investing 5% of your paycheck already and your employer will match 100% the first 5% you contribute. That means you put in $2500 or 5% of $50K and they will also put into your account $2500. If you put more, your company is still only going to put in $2500. If you put less, your company matches whatever you put.

Sometimes employer matching has a vesting schedule attached to it. A vesting schedule is essentially a time delay between when the money your employer contributes becomes "yours," and is used as an incentive to keep employees with a particular company.
When you open your 401(k), you'll have to pick your investments. Your employer usually works with an investment broker to come up with a list of options. This means you're stuck with the list they offer. There are three different categories you can choose to invest in they are Life Path Funds, Stock Funds and Bond Funds.
Life Path Funds/Target-Date Funds: These funds are pretty simple and basic. You pick your target date for retirement, and then pick the matching fund. Because they're so simple, there's not much maintenance, as the fund adjusts your asset allocation over time. The fees of target-date funds might be higher.

Stock Funds: As the name suggests, this type of fund covers a variety of stocks that you can invest a percentage of your account in. You can choose index funds or any other types of stocks your broker offers. Stocks have more risk therefore potential for more reward.

Bonds: These are funds that are meant to safeguard your money, but your money won't grow much with these funds. Less risk means less rewards.

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