Even though investments are a long-term game, even long-term investments can have a return on Day 1. Curious what this investment is? Read on to find out!
The investment that could benefit you the most is your company’s 401(k). During a study in 2015, executed by the Financial Engines, it was revealed that $24 billion a year was left on the table because of a lack of 401(k) contributions, even though this investment could double your invested money!
A 401(k) is a retirement plan provided by employers. To benefit from the 401(k), employees can pay a portion of their salary into this investment. Then, the money is invested based on your preferences. The interesting part? This investment is deferred from taxes!
Even though you will see a return on a 401(k) investment on day one, there are some limitations, which is usually the case with good investments like this. Unfortunately, you won’t be able to withdraw any of your investments until you reach the age of 59 and a half. If you do decide to withdraw some of the cash, you’ll need to pay a penalty.
Experts recommend not to touch your 401(k) until you’ve retired. Once you retire, you can start withdrawing them money and benefit from this investment. However, once you start withdrawing the money, it will be seen as taxable income. That being said, the taxes on withdrawn 401(k) investment money will be lower than normal taxable income.
Your Investment in Numbers
The 401(k) sounds good in theory, but what does it look like in actual numbers? To help you see the benefit of this investment, let us give you a practical example of the 401(k).
Let’s take the example of an employee that makes $75,000 a year. Many employer will match a portion of your contribution. If the company offers you a 5% contribution of your salary, your 401(k) will receive an additional $3,750 a year. Each contribution you make to the 401(k) is subject to an immediate return of 100%, which means that employees can double their initial investment in no time at all!
Where Your 401(k) Investment Goes
Depending on the length of your investment, your 401(k) is likely to be invested in stock mutual funds, which includes low-priced index funds. There investment options give a 100% return, but also a lot of downside protection which makes it quite safe.
Not Suitable for Everyone
Before you start considering the 401(k), we have to mention that this type of investment is not suitable for everyone. If your salary is limited, then this option is not going to be for you. Also, you might have another investment pending, which leaves you with no additional funds to invest. Therefore, the decision to invest in a 401(k) is a decision that needs to be taken carefully.
The 401(k) is incredibly attractive, since it can double your investment over a short period of time. However, employees will only get the most from their 401(k) when they have the wage to match and the ability not to withdraw any money until they reach retirement age. If this sounds like something you could do, then 401(k) will be the best investment for you.