What is the "simple" in's and outs on having a 41k ?

Question

I havn't been out there in the routine working world in a long time thus am just stupid about 41K matters and/or how it effects tax matters which I also am concerned about! Whats the wisdom I need here as I'm getting old and going to work!?

Answer 1

Well, first you need to learn that it is called a 401(k), after the section of the IRS tax code that pertains to it.

A 401(k) is a way for you save money for retirement by having a certain percentage deducted from your check. You don't pay taxes on the money when it comes out of your check; the idea is that when you are 65 and withdraw the funds you'll be in a lower tax bracket and thus pay less tax. So it is tax deferred, not tax free.

It also lowers your current taxes because the part of your check that gets taxes already had the 401(k) funds come out of it - so you are being taxes on a lower gross amount.

Most companies allow you to choose from a variety of different funds in which you can invest your 401(k) contributions. Your company's plan provider may have automatic investment functions such as moving funds into the appropriate risk group based on yoru age.

Last, but not least, there is the great benefit of free money, also known as your company match. Let's say they match 50% of the first 6% of contributions. That means that if you put in 6% of your check, the company will give you $0.50 for every dollar you put in. You usually have to work there for a while to get the company funds out if you leave (you always get the value of your own contributions if you leave.) This is called "vesting."

It's a great way to save, and the sooner you start the richer you'll be at retirement.