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What’s a 401k and Should I Have One?



It is critical that you spend time thinking about your financial just as much as you think about your current financial situation. If you don’t start saving for retirement, you may find yourself unable to retire until late in life or not at all. Therefore, it is important to understand what a 401k is and how it can help you get ready for life after work.


What’s a 401k?


A 401k plan is a retirement plan that allows you to grow your money tax-free. You are allowed to contribute $17,500 of wages into this fund for the 2013 tax year. In addition, your employer may match your contributions to some degree. If you are self-employed, you are allowed to contribute an additional amount equal to 20 percent of your earnings if you are a sole proprietor. Corporations can contribute up to 25 percent of your earnings as an employer contribution to your 401k.


Should I Have One?


Yes, you should have a 401k. As long as you meet employer guidelines, you can start contributing money immediately. If you are self-employed, you can start contributing immediately without restrictions. The money that you put into a 401k will not be taxed until you take it out of your account.


When Can I Access My Money?


You can access your money when you are more than halfway past your 59th birthday. If you take out your money before then, you have up to 60 days to put the money back into your account without it being considered an early withdrawal.


Failure to replenish your account before the time is up triggers penalties that need to be paid to the IRS. The penalty is 10 percent of the amount that you withdrew early. In addition, you have to pay state and federal income taxes on the money.


Exceptions to this rule may be made if you are experiencing a medical hardship or are using the funds to purchase your first home. Loans of up to $50,000 may be taken out as long as the plan documents allow for it.


The Miracle of Compounding Interest


The reason why you want to fund a 401k is to take advantage of compounding interest. On average, you will see a 6-10 return on your investment. This means that your money would double once or twice per decade without doing anything to earn that money. If you contribute regularly, you will see your account grow exponentially during your career.


Can AFN Help Me?


AFN may be able to help business owners make contributions to their 401k plan as well as to the plans of any eligible employees. Merchant cash advances and other advance funding options will use your credit card receipts or other income as collateral. When you get your money, you can use it for any purpose that you want. The loan is then repaid in monthly installments.


Anyone who has a 401k plan available to them should take advantage of it. You get the benefit of a tax break now while watching your money grow faster than it would if you just kept it in the bank. If you haven’t started thinking about retirement yet, now is the time to do so by starting your own 401k.

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