How does a 401K work?

Question

Please don't use big words...

Answer 1

you let an investing company take money out of you paycheck before they take out the taxes. so you don't pay taxes on the money they take out. Sometimes your employer matches a certain percentage of what you contribute...for example $5 for every $100 you save. Then the investing company saves your money and it gains interest until you are 59 or 60 years old- so you can retire and use the money. If you need the money early that's fine, but you pay back the takes you skipped and also a fee to the investment company for taking it early.
My example: I let my employer take about $150 out of my pay each time. Last year I saved up a few grand and my employer pitched in $500. I got a bigger tax refund because I didn't pay taxes on any of that money. By the time I'm 60 I hope that by gaining interest my money will add up to a few hundred thousand dollars. not bad. best to start as early as you can- more time to gain interest.

Answer 2

It's a retirement account that may be offered by your employer. Not all employers offer one. If they do, it's a good idea to have a 401(k) account. The money you put into it is not taxed (until you take it out years from now), so you get a tax advantage. Also, sometimes, employers will match some of your contributions (that is, put in an equivalent amount). That increases the amount in the account.

If your employer doesn't offer a 401(k), think about opening an IRA account, which is a retirement account that you set up for yourself.

Answer 3

A 401(k) is named for the Internal Revenue Service tax code section 401 subsection (k). This is a retirement account offered by for profit companies that allows them to contribute to your account and get a tax write off.

The money you contribute is contributed pre-tax (just like a traditional IRA), so it comes off of your gross taxable income. There is generally a vesting (waiting) period of 5-7 years to be able to keep the companies matching contribution but once that is completed all the money in the account is yours. Your contributions are always yours. When you leave the company you can take the money and put it into a rollover IRA which will allow you to roll the account back into another companies 401(k) if they allow it. You can also roll it into a traditional IRA but if you mix it with traditional IRA money it's referred to as co-mingled and can't be rolled into another 401(k).

This works exactly like a 403(b) without the tax writeoffs because they are offered by non-profits.

Answer 4

It's a retirement plan that a company sets up. Money is taken out of your paycheck to go into it, and you don't pay federal income tax on that money until you take it out of the plan.

Sometimes, not always, the company matches some of the money you put into the 401k, and adds their match in too.

You usually have several options for investing the money.

Answer 5

so 401k is for retaiment you put money in every month or anualy and the firm invest that money in stocks, bond, etf, mutual faund and cds,