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401K

Definition

A 401K is a retirement plan offered by most companies to help you save and invest for the future.

Why It's Important

I hope that everyone reading this is contributing to their 401K at work if they have one available (especially if the company matches).  There are two types of 401Ks, Roth and Traditional.  Roth 401Ks allow you to contribute funds post tax but, when you withdraw, money is tax-free.  A traditional 401K allows you to contribute money pre-tax but when you withdraw all funds are taxed.  

So, here is how to pick which one you should invest in.  If you are early in your career and in a low tax bracket, you should pick a Roth.  Why?  Because the money is taxed at the lower rate instead of being taxed higher later when you make more money.  If you are seemingly at the height of your earning years, you should contribute to a traditional because the money is not being taxed as it's going in, it is going to be taxed as it is coming out when you are making less.  

I understand that I made very blanket statements and it would depend on your situation but that is the general rule.  Some people do a hybrid approach where they contribute to both so they can have options in retirement.  That is fine too!  However you choose to invest, just do it!  Let the money come off the top so you don't even miss it.  
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To learn more, read my article 5 Mistakes You Could Be Making With Your Retirement Accounts.

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