What Is a 401k, and Why Do I Need to Worry About Retirement Right Now?


When you’re young and suddenly find yourself with a few extra bucks to spare, would you rather set them aside for decades from now, or put them to something you really, really want?

That’s the question every nagging parent asks their child as they make their grand entrance into the workforce and towards subsisting on their own. While it can be plenty annoying to hear every single family member tell you to save your money at every chance they get, they do it for a simple reason: to finally get you to think about retirement.

For most people well under the retirement age, retiring is the absolute last thing they’re thinking about — unless it involves winning the lottery or an accident suit. When you’re finally on your own, in the company of good friends, and have some disposable income, you just want to buy whatever you can possibly afford and worry about the outcome later.

This approach, however, not only leads to inevitable debts and a really crowded apartment, but further delays when you can actually retire. After all, if you spend every penny you earn, what are you going to draw from in retirement when you stop earning money?

Luckily, there’s one interesting way you can save money for the future, legally avoid paying some taxes, and actually get more money from your employer. It’s called a 401k, and it’s about to rock your goddamn world.

401Ks are retirement savings accounts that some (but not all) employers offer.

401k-1
Wikimedia Commons

They don’t stand for “401,000.” The “401K” comes from the section in the IRS’s Internal Revenue Code where they were established and defined. Exciting stuff!

They let you take a percentage or fixed amount from your paycheck and put it aside, where it will be invested in mutual funds, stocks, and bonds.401k-2

With some 401k accounts, you can choose to deduct what you contribute from your taxes.

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Flickr/Pictures of Money

If you make $45,000 and contribute 3% — or $1350 — you’ll only be taxed on $43650 of your income that year. When you withdraw from the 401k in the future, however, you’ll be taxed on the amount withdrawn based on your then-current tax rate.

Other 401k accounts, like Roth 401k accounts, let you pay taxes on your contributions now so you don’t pay taxes on them when you’re retired.

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Flickr/Robin Riat

This could all be yours!

Best of all, some employers will match your contributions to your 401K — or provide a percentage of their profits.

Shutterstock
Shutterstock

For every dollar you put in, your company might put in 30 cents. If you put in $100 to your 401k, your company will add $30 in this instance. There’s likely a minimum you must contribute to get these matches, and there’s only so much they’ll match each year, but still. Free money (kinda)!

Whatever you and your employer put into your 401k will hopefully grow as the market grows, leaving you with a nice return upon retirement.

SeniorLiving.Org
SeniorLiving.Org

There are fees associated with maintaining your account, along with numerous penalties for withdrawing from your 401k too early.

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Shutterstock

For instance, you can’t just withdraw the money your employer matches. It has to stay in your account for a set period of time, and even then, you’ll incur penalties if you withdraw before your retirement.

If you have any questions about maintaining your personal 401k account, be sure to ask your HR representative, or whoever’s in charge of managing the 401ks. They’re legally required to help you.

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Flickr

You can’t beat free financial advice, especially from these guys, right?


If you ever leave your job, your 401k isn’t lost forever. You have the choice to take it with you, convert it to an IRA, or cash out before you retire. The last option is a terrible idea, because it means taking pennies on the dollar due to heavy penalties and taxes, which defeats the whole point of the 401k in the first place.

If you manage your 401k carefully, contribute a percentage from each paycheck, and leave it alone, you’ll find yourself with actual retirement savings. Your crotchety, old self will thank you!

Share this knowledge with your friends below, and help them save for the inevitable.


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