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What is a 401(k)?


Do you know what a 401k is?  A 401k is a personal retirement account that you put money into for your golden years.

Pensions have become outdated, as it place an enormous burden on companies to save enough money in the pension fund.  Not only that, but many employees change companies/jobs multiple times in their careers, and few stay at one company for decades.  Few companies continue to offer pensions.

Social security was always meant to be a government insurance plan for those people who outlived the average lifespan.  It was never meant as a retirement plan; however, the social security eligibility age never indexed with the average lifespan as we are living longer lives.  People now rely on Social Security as a retirement plan.  The problem is, Social Security is solvent only as you have more people paying into the system than taking out of the system.  This is currently not the case.

In the 1980s, 401k’s were created for you to save money on your own, for your own retirement.  Money that is put into a 401k is not taxed in the current year.  That money will be taxed at a later date, when you withdraw money.

Here are a few points on 401k’s:

  1. They are offered by employers.
  2. You can contribute $18,000 maximum in 2016.
  3. If your employer matches a certain amount of your own contribution, then you need to have your contribution higher than that level.  That is “free money” by your employer for your retirement.
  4. Invest your 401k money in the markets so that they will grow.
  5. Do not, under any circumstance, withdraw any money from the 401k.  There is a 10% penalty on early withdrawal, in addition to being taxed on the withdrawal.

If you have not paid attention to your 401k, you need to do so now.  The greatest ally you have with the 401k is the amount of money you put into it, the tax-deferred benefit, and time.  With time, that money will grow.