If you're a recent grad, you might wonder why you should invest money in a retirement plan when your career is just getting off the ground. Turns out, it’s never too early to start saving for retirement, and putting money in a savings account isn’t the only way to plan for your future. One of the benefits many companies offer is a retirement plan. At Reynolds and Reynolds, we offer a 401(k) plan to help prepare our employees for retirement.

If you’re new to investing, the financial terms can seem a bit confusing, but understanding how a 401(k) works can help you better plan for your future. Consider this a quick guide to some of the information you will come across when looking at a 401(k).

What’s a 401(k) anyway?

A 401(k) is an employer-sponsored investment account designed to help employees save money for retirement. You can control how much money you contribute to the account, which is usually determined by the percentage of your salary you would like to invest. Depending on the age you retire, you'll be able to withdraw money from the account without penalty. Hopefully you started early and saved enough to cover your post-retirement life, as is the goal of a 401(k).

Why start saving now?

Retirement may be the furthest thing from your mind right now, but starting to save early means you won’t be scrambling to catch up later. Due to compound interest, the longer your money has to grow, the more return it gets. As financial blog 20SomethingFinance points out, saving $1 in your 20’s is the equivalent of saving $10 in your 50’s!

What does ‘matching’ mean?

Some employers will match any savings you contribute to your 401(k) up to a certain percentage. This is an added benefit for employees and one that can help your retirement savings grow larger, faster. If you don’t know how much of your salary you want to invest, use the company’s matching percentage to determine a good starting point.

What is vesting?

Many employer-matched retirement plans involve a vesting period, for example, 2 years. This means, if you were to leave a company before the end of that period, any matching funds from the company will not be added to your account. You will, however,  be able to keep any money you’ve invested since that's money you’ve earned.

What kind of savings plans are there?

There are two main types of 401(k) plans: Traditional and Roth. Companies may offer one or both of these options to their employees. The main difference between the two is determined by when taxes are taken out of the savings. A traditional 401(k) is based on your income before taxes, which means taxes are taken out when you withdraw money from it at retirement. A Roth 401(k) works the opposite way: money is taxed now, rather than at retirement. Both plans have their pros and cons, so if you’d like a better idea of what might work for you, I'd recommend talking to a financial professional.

I’ve only covered the basics of saving for retirement, and there are a lot of options on how to invest for your future. I’m not a financial professional, so I'd recommend talking to one about how you can best manage your money for the long-term.

Disclaimer: This article is for informational purposes only and is not intended to serve as financial advice. Please contact a financial expert for more information.