In addition to a regular 401(k) plan, military personnel have access to a special thrift savings plan (TSP) account that acts like the 401(k) plan in the private sector. Setting up this account and regularly stocking away money into it can help you grow your savings over time.
Savings are very important both for your present and future. Financial freedom and peace of mind requires not only paying your bills and being debt free, but also putting away enough for retirement and discretionary expenses. Saving, budgeting and investing must be essential components of your financial plan and a 401(k) plan is one important tool in your savings plan. (For related reading, see: Breaking Down the TSP Investment Funds.)
401(k) Plan: What Is It?
In simple terms, a 401(k) plan, a type of defined contribution plan, is a plan to encourage employees or workers to save for retirement. Typically sponsored by an employer, the plan lets you pull out a part of your monthly paycheck into your retirement account before taxes. Taxes are not paid until the money is withdrawn from your account, typically only at retirement. By withdrawing money from your paycheck prior to taxes, you also lower your taxable income and thus lower your taxes as a whole.
Defined contribution plans remain the preferred type of 401(k) plan according to the Bureau of Labor Statistics, although a large majority of Americans do not fully use or invest in the plans offered through their employment.
How Much Can You Contribute?
The IRS sets a cap for 401(k) plans per year. In 2015, the limit was $18,000. In addition, employees over age 50 can also make "catch-up contributions" of up to $6,000 above and beyond the maximum amount to help them build up their savings.
The 401(k) plan offers significant pre-tax savings over time and can help you retire with dignity and a solid nest egg. As a benchmark, investing at least 15% of your income into a Roth IRA and 401(k) plan can help you in achieving this goal.
The Solo or Individual 401(k) Plan
For a long time, the 401(k) plan has been a standard retirement investment tool for American citizens with over 750,000 plans available. However, these plans initially were restricted only to employees working at large enough companies to support these plans.
Today however, there are over 25 million sole proprietorships. For these individuals, a solo or Individual 401(k) plan is suitable and offer the same 401(k) benefit that employees of a large organization benefit from. Whether you are a lawyer, doctor, consultant or in any other occupation working for yourself, you can still apply for and get a 401(k) plan set up for you quickly and easily. Solo 401(k) accounts do not have account minimums and only have a low platform fee (associated with any account). Other savings accounts you may want to consider setting up include IRA accounts.
The 401(k) plan is just one part of your savings plan. You will also want to have set aside emergency funds for immediate use and an IRA account. Speaking with a financial advisor can help you determine your current financial picture, identify your goals and the steps you will need to take financially to achieve those goals. (For more from this author, see: 5 Financial Concerns Military Families Face in 2017.)