Process of 401K?

Question

how does that whole process work? My work is starting a 401K program soon and I have no clue what it is... please explain the process! thanks!!

Answer 1

A 401K is a retirement account. You sign up and put a portion of your pay in each payday. The money is invested in usually mutual funds. You will have an opportunity to pick the funds when you sign up but 401K's usually have a limited number of investments to choose from.

On a lot of 401K's, your employer will match a certain amount of your investment, meaning you are basically getting "fee" money from them. Most of them have a "vesting" period. Meaning, you can't have the employers money until after you've worked there a certain number of years. Typical is you'll be able to get 25% of the employers contribution after 1 year, 50% after 2 years, and so on but sometimes, there is no employer contribution at all so the only money in there is your own.

The money that you put in is tax deferred until you take it out, meaning, when you get your W-2, you will pay taxes on your income less your 401K contribution. When you retire and start taking the money out of the 401K, you pay taxes on it as you take it out. The theory being that you'll be in a lower income tax bracket at retirement so the taxes you pay on the money will be less.

However, if you take the money out early, like when you quit your job, you are penalized 10% by the IRS plus you'll have to pay the taxes.

If your employer is contributing to this 401K, it would be wise of you to sign up for it. They are a great investment. If your employer IS NOT contributing, you would be just as well off to open an IRA and basically accomplish the same thing but just with more choices of investments. A Roth IRA would be even better.

Answer 2

401k is an investment. Part of your money (taken from your check-designated by you on a percentage), and in some cases of the company's funds, go together to invest in different stocks, mutal funds and currencies to get a return on your money.
It is not mandatory to enroll. But, if your going to be a part of ghis company, and/or you are young, get involved with this program.
Also, good 401K programs with have your employer contrbiuting as well. Ask if see if you contribute a dollar, how much does your employer match. The more the better. Also, all this is pre tax so if you contribute $100 in a month, you will not be taxed for that money when you get your check. Finally, if you do invest with the 401K, monitor the results. If you are not getting a good return, you can opt out of it.

Answer 3

Its a retirement plan, obviously. There are 2 ways your 401K can be funded, a pre-tax deduction from your payroll or contributions from the employer, or both. The employer will make the necessary deductions from your payroll, employee funded is most common, and then deposit it with a 3rd party administrator. The 3rd party is required by SOX for the US Securities Exchange Commission. There are annual contribution limits, $15,500 was the limit for 2006. You can specify how much you want taken from your paycheck 3%, 5%, 10%. You can take loans from it, but there are penalties that you'll incur.