401K’s Explained

I considered the title “401K’s for Dummies,” but that didn’t seem fair. There is a lot of information about 401K’s that is not widely known. And that does not make you dumb. The first thing I think of when I hear 401K is Pheobee from the sitcom Friends calling it a 4-O-Onek. Always makes me laugh. So for starters you call it a 4-0-1-K. Now, let’s discuss what it is a does then.

Here is a definition given from Wall Street Journal: a 401K is a retirement savings plan. It is a plan sponsored by an employer. It allows employees to save and invest a piece of their paycheck before taxes are taken out. You will be paying less in income taxes this way, initially. Taxes are not paid until money is withdrawn from this account.

Further explained by the Help Center, a 401K is a retirement plan that allows employees to save and invest for their retirement on a tax deferred basis. Not just anyone can get themselves a 401K; they must be sponsored by a company. The employee decides how much money will be deducted from his paycheck and put into the plan. But there are limits imposed by specific plans and IRS rules. Employers may also make contributions to the plan, but it is optional. This may be one thing to consider when looking for jobs; companies can offer competitive 401K plan contributions.

There are restrictions to these retirement plans. More often than not, you cannot take money from the employers’ contribution for a certain amount of time. This helps companies keep employees from leaving early. You may take money out from your contributions, but there are penalties for taking money out before retirement.

The company has the responsibility to manage these plans in accordance with the law, rules and regulations, and all other specifics to the plan itself. This includes making decisions about who is eligible for the plan, how often and how much (max and minimum) the employee can contribute, how much the company will contribute or match, what investment options/opportunities the employee will have, how often the employee can relocate her investments. With all there is to consider and decide many companies hire an overseer to manage these accounts such as Fidelity or Vanguard.


Important things to Remember

Do not postpone contributing in a 401K. Starting early and being consistent is the biggest guarantee you will meet your retirement goals. Even if you start contributing one or two percent in the beginning, all contributions will make a difference.

A 401K is not a savings account and money placed in this account is not easy to access.

The plan sponsor (the employer) is required to provide you with a Summary Plan Description. You should keep this because it explains the ins and outs of your plan.

You are the only person who can plan for your future. You should take full advantage of your plan. Educate yourself. Ask questions. Look at the sites I have listed here and any others you can find. Your future is in your hands. Good luck!

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