You might think that while you're young, and on a starting salary, it's not worth trying to save for retirement. That can be a mistake.
The Securities and Exchange Commission says that time can be a critical factor in the returns you earn from your investment. Even if the amounts you can invest in a 401(k) seem small to you, they can make a big difference to your retirement fund if they're earning returns over decades.
Many employers match employee contributions to their 401(k) accounts. If you put a percentage of your salary into a 401(k), an employer might also put in a percentage, up to a certain limit.
FINRA puts it bluntly: "If you contribute less than your employer is willing to match, you may be passing up free money." If your circumstances allow it, you may want to consider making sure your 401(k) contribution meets your employer's matching limit.
The IRS explains that your employer's contributions may vest gradually, meaning those contributions may not belong to you until a certain period of time has passed. (Your own contributions are always 100 percent vested.) Check with your employer's HR department about matching contributions and any rules that may apply.
Generally, you can't withdraw from a 401(k) before a specified age without a specific reason. The IRS lists some of them, which include suffering financial hardship (if your employer's plan allows hardship distributions). Certain medical expenses, burial and funeral expenses, and certain home repairs are examples of potential hardship withdrawals.
Avoid withdrawing from your 401(k) if you possibly can. Early withdrawals may set back your preparations for retirement, and are subject to penalty tax in many cases, according to FINRA.
In many cases, if you withdraw from your 401(k) early, you not only pay income tax on the withdrawal, but also an extra 10 percent penalty tax. (The IRS lists the exceptional situations where you can withdraw penalty-free.)
So whenever possible, it's best to leave your 401(k) balance alone to grow.
When you change jobs, you might find yourself with two 401(k) plans — your new employer's and your old employer's.
Don't forget about your old 401(k) accounts — it's your money!
As FINRA notes, when changing jobs, your options may include withdrawing money from your old 401(k), leaving it where it is, rolling it over into the new plan, or rolling it over into an individual retirement account (IRA).
A 401(k) can be a valuable retirement preparation tool, and typically the earlier you start saving, the better off you'll be. A financial professional or an Allstate agent can help guide you as make decisions about retirement savings that are right for you.