What Exactly Is a 401K?

Updated on December 20, 2010
D.F. asks from Monmouth Junction, NJ
20 answers

My husbands job is pushing him in to signing up towards the 401k plan. What exactly is it? Is it worth signing up for?

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answers from Pittsburgh on

It's a way to save (pre-tax) for retirement.

Do not confuse this with a normal savings account. There are HUGE tax penalties for accessing this money before retirement.

Generally, the sooner you start, the better.

Many companies "match" a certain (percentage) amount and you would be very wise to participate.

Many companies are getting away from the "pension" mentality and placing the responsibility of saving for retirement squarely on the shoulders of the individual--where it belongs. Jump in!

3 moms found this helpful


answers from Dallas on

It is a retirement plan.

I would push my employees to do it as well because it is a no brainer for saving for retirement.

Many companies will match funds which means you have more.

It is not a general savings account, 401K can be used for retirement and if you take the money out you pay dearly in taxes because it is set up to be retirement.

DO it.

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answers from Modesto on

Sign up. The sooner you save for your future the better. If you start now you'll have a million by the time your 60 something.
My mom just retired and has 200 grand in her 401k, that's not a lot but they had only been saving for 15 years.

2 moms found this helpful


answers from Atlanta on

YES -it's worth signing up for, particularly if you don't already have some guaranteed retirement accounts.

A 401K is a retirement savings plan and most companies match whatever you contribute every month. It can be a fantastic way to save for retirement. The 401K is operated through a financial company that looks at investments in the stock market, mutual funds and other areas of financial growth options and decides where to invest the 401K money. The beauty of the 401K is that it's relatively safe, provides earning potential far beyond bank interest for your money AND your husband's employer also contributes money to it. There are high risk, medium risk and low risk options depending on how much you want to play with your money. When and if we have a stock market crash like the one a few years ago, you do stand to lose it, particularly if you're in a high risk option (although you can "ride it out" and hope that the stocks come back). However most 401Ks invest your money across several areas so you don't completely take a bath.

Your husband's employer should have presented him with a packet from HR explaining all of this and exactly who would administer his 401K, how much the company donates/matches of his contribution and all the different options he has with it. He can certainly sit down with HR and discuss it with them if he has questions. It's one of the best retirement savings plans you can have. You may want to google it and other retirement savings accounts to see what you like the best, but a 401K is one of the only ones where you'll also receive compensation from the employer. In most cases they've replaced pensions -although some companies still offer both.

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answers from Boston on

I agree that it is worth signing up for. A 401k plan is a retirement account that you deposit pre-tax money into. Since your contributions are pre-tax, it may actually lower your taxes for the year. The money grows tax free until you retire. Each employer's plan has slightly different provisions. Many employer plans match what you contribute (e.g. 25% or 50% of your first 6% of contributions). Money in a 401k cannot be taken out of the plan prior to retirement age unless the plan allows for loans or in-service withdrawals. Withdrawals prior to age 59 1/2 do incur a penalty. I would encourage your husband to ask questions about the plan to make sure he understands the plan provisions, but it is definitely a good thing to invest in.

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answers from Denver on

If the company does a match, at LEAST sign up for the % that is matched. Otherwise, you are turning down free money.

It is a retirement plan that involves investing. It can be bond or stocks, so while there is risk, he can choose a level of risk that is acceptable for your family (generally, the younger you are, the more risky your investments can be).

If the market crashes, that can clear you out, but that shouldn't stop you - after all do you have some other retirement plan that is guaranteed? Right now is a good time to start - start in a bad economy, try to cash out in a good.

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answers from Boston on

YES!! Sign up NOW!

1) For the future: saving for your retirement is a responsible & smart thing to do

2) For now: immediate savings on your income tax (401(k) money is taken out of your pay before income taxes are calculated; therefore, you pay less tax on the money you're earning today. Taxes are calculated when you withdraw the money -- and usually that will be at a much lower rate).

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answers from New York on

yes... you can put money away for retirement... it's great way to save.. they take money out of your check before taxes... and put away for you.. you can ask them to take out like 10. a week or 20. dollars... or a percent.. like 8% and they put it away and it makes interest. ... you can't take it out until you retire... if you do.. you get a big penalty.. if you leave this job.. you can roll it into a ira or into your new company. some companies actually give you like 25 cents for each dollar you put in.. tell him to do it.. start out small.. like 6% of his paycheck.. after he sees the money growing.. you can change to 8% 10% or anything like that..

1 mom found this helpful


answers from Detroit on

A 401k plan is a retirement fund. Normally, he contributes pre-tax dollars out of his paycheck into it and the company he works for usually matches up a percentage to his money. If there is a hardship in years to come, he may be able to withdraw some of the money in the fund, but he will be penalized and taxed for it. The age to withdraw I believe without penalties is 59-1/2. My opinion is that yes, it is worth signing up for. Saving money is always a wise decision.

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answers from Norfolk on

It's something to help you save for retirement and has largely been replacing pensions for years. It's worth it. It's particularly good when the company does a percentage match (your husband might be able to put in up to %15 percent, but the company might match what he puts in up to %6 percent).
You typically have more control over how your 401k is invested than a pension.

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answers from Rochester on

Absolutely he should sign up, it may be the only retirement income he has come time for retirement! You've gotten a lot of great answers here, the one thing I haven't seen is that if he leaves his current job, he can roll any contributions he made to the account into an IRA or into a 401K at his next job. Any contributions the company makes would be his to keep once he has been there long enough and they would roll into the new account as well as long as he as been there as long as the company requires.


answers from Washington DC on

If his employer is matching the contributions - then sign up!!!

A 401K is a retirement savings account. The funds are tax deductible - i forget if they are pre or post tax, but it's still a tax deduction.

If you are young - this is a GREAT opportunity to put money away for your future - your retirement!!!

If the employer matches the contributions - the account will grow faster. If he stays at the company long enough to be vested - then if and when he leaves, he takes it ALL with him!!! A roll-over is what he would do so you don't get dinged by the IRS for an early withdrawal.

If you do an early withdrawal - you MUST ensure that this is a TRUE emergency - MUST HAVE - and ENSURE the account holder takes the taxes out - if not - you will be SCREWED ROYALLY!!



answers from New York on

YES, its worth it...if the company is matching, then thats free money toward your retirment. The best return on investment you can have. It's for the LONG TERM though, not the short.



answers from New York on

I understand now that it is a great thing...but years ago when my husband and I were first married and he told me he wanted to bring home less money every month to put it into a retirement account I was not happy. Luckily he did not listen to my "we really can't afford that right now" argument, especially since he works for a private company, not a state or federal type of job and therefore has no pension. He has been investing the max amount allowed which I believe is somewhere between 10% and 15% of his salary for the last 14 years, with his employer matching the first 6% he invests...at this point we have $250,000 in the account and because he plans on continuing to invest and the interest keeps compounding, according to his estimation we should have approximately $3.7 million dollars by the time he is ready to retire at the age of 62. Even if you think you can't afford it (like I did) it is a good investment in your future!! I believe there are even ways take a loan and borrow against the money should you need it and then you are paying yourself back instead of a bank. Good luck in your decision!!



answers from New York on

One of the biggest financial mistakes many people make is NOT taking advantage of a 401K plan.

Everyone's plan is a little different but basically here's how it works...
It's pre-tax, so that means the money is deducted from his gross pay (the amount before payroll taxes are deducted). So if hubby makes $800 a week, and he elects to have $50 a week put into 401k, the taxes will be based upon $750. You will need to pay taxes when you withdraw the money from the account.
In most cases your employer will match up to a certain amount. So if hubby chooses to put in $50 a week, his employer will put in $50, so you'll actually be investing $100 a week.
Hubby gets to choose what type of investments (stocks, bonds, money market) he would like to invest in. Many plans have a default where you can let the investment manager (that's NOT his employer, it's the company that is managing the funds) choose for you.
As with all investments, there are risks involved, so there is a chance you can loose money. Typically you'll get a statement every 3 months to let you know how your account is doing. Most companies also have on-line access so you can check it as often as you wish. Remember that this is saving for retirement, so you need to focus on the long term.
Even though this is your money, you will not have access to it. It's not like a savings account where you can withdraw it at any time. There are certain rules for withdrawing, some are set by the IRS and others are set by the retirment plan. If some major unseen financial event occurs, (often called a hardship), such as a major illness, you may be able to withdraw the funds, or borrow from it. If you take out money before retirement age, not only will you have to pay the taxes, but you will also have to pay a penalty. Remember, the point is to save for your retirement.

Now after learning all that, it seems like it might be a bad idea. It's not. You should invest. It's one of the best financial decissions you can make.



answers from Johnstown on

It's a retirement savings. Almost all big companies, and many small ones too, are pushing for it these days. It seems like a pita, but in the long run it does ensure you'll have atleast a little something when retirement hits.



answers from Chicago on

Of course! Saving for retirement is always a great idea! Ideally, you should be putting aside 15% of your annual income into some sort of retirement account.



answers from New York on

Hi D.,
It is a tax deferred investment plan. You put in a percentage of salary now, and it is taken out of the paycheck before taxes, thereby lowering the taxable income. Some employers put in a matching amount up to a certain percent. You choose the investment vehicle - high risk for your younger years, lower risk 15 years or so before you plan to retire. Then, you take disbursements once you are of retirement age, when the tax rate is much lower and you've earned good interest on it. I'd say put in as much as you can afford. However, keep in mind that a 401K is NOT a savings account, you can't just take the money out for an emergency, there are large penalties and taxes for doing so



answers from New York on

Everyone has already given you the details but here is the emotional reason. If the money is taken out of the paycheck before you get it you don't feel it as much but you are still saving for the future.



answers from New York on

YES !!!! It is VERY worth it to sign up for it. Basically it is a investment account who's earnings will not be taxed until you retire. Often the company matches funds you contribute to it, so it's like free money. You cannot take money out of it without a penalty (though you can usually take out a loan from it for major expenses like buying a home or major medical expenses, but I advise against that). A 401k is the best way to save for your retirement because it is relatively safe, and tax-free, which means all the money you put in will continue to earn money for years and years, and that adds up to A LOT of money, even if you only put in like 2% of your paycheck.

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