Let's Talk 401ks

Written By:
Haley Sacks
(aka Mrs. Dow Jones)

WTF is a 401k?!

A fun thing about getting a job is they ask you about 401ks and expect you to know what they are! (And by fun, I mean scary). So here's a guide so you're never confused again & can leverage these retirement accounts for all they're worth (which, by the time you're 59 1/2 and able to withdraw them, could be a lot!)

The 401k FAQ

  1. What is a 401k, really? A 401k is a tax-advantage retirement account that's offered by your employers.
  2. How does it work? Money is deducted from your paycheck pre-tax and grows in a separate account, tax-free.
  3. Do I pay taxes on a 401k? Yes, but not until you withdraw your money at age 59 1/2.
  4. What's a 401k match? A match is when your employer matches your 401k contribution up to a certain percent. Not all employers offer a match, but if yours does, TAKE ADVANTAGE! This is literally free money & the only time in your life you're guaranteed a 100% return on your investment.
  5. Do they invest it for me? NO! A 401k is just an account they offer you. You need to actually INVEST the money within the 401k to see returns.  If you're wondering what to buy, check out target date funds. They target the date you want to retire and build a risk profile around that.
  6. How much should I be contributing? The easy answer is as much as you possibly can! Every year, the IRS sets an annual contribution limit, and this year it's $22,500. So let's say you get paid twice a month, that would mean contributing about $938 per paycheck to max it out. Too much for you right now? No problem, queen! Starting small is better than not starting at all.
  7. What's the benefit of a 401k vs. a Roth IRA? The biggest benefit to a 401k is that it's tax-free and therefore lowers your taxable income. But if you're deciding whether to contribute to a Roth or 401k first, in my Money 101 course, Start Here, I explain that there are levels to this game: Level 1: Get your 401k match, Level 2: Max out Roth IRA, Level 3: Max out 401k