Basics of your 401(k)

Basics of your 401(k)

May 02, 2024

79% of Americans can invest in a 401(k), yet only 41% participate. Of those eligible, most are unsure of how their 401(k) plan works.

A 401(k) plan is a retirement plan offered by many employers that has tax advantages for the saver.

Here are some key areas to understand as it relates to a 401k plan:

  • Taxes
  • Matching
  • Contribution limits
  • Control of your investments
  • Vesting

Taxes

A 401(k) can be a Traditional or a Roth. Depending on which type it is will have different effects on your taxes.

A way to easily remember this:

Traditional 401(k) = Pay taxes later

Roth 401(k) = Pay taxes now

Your employer has control over which type of plan they will offer.

Matching

Some companies who offer a 401(k) will offer a match.

Did you know According to a 2024 study by the Plan Sponsor Council of America, 98% of companies that offer a 401(k) also offer employer matching?  In employer matched 401k plans, employers will contribute to an employee's 401k, up to a specified amount. 2

For example if you make $50,000/year & your company offers a 3% match, put 3% of your salary ($1,500) into your 401(k), your company will also put $1,500 into your 401(k) for you.

Passing up an opportunity like this, is like passing up on free money.

Contribution Limits

For 2024, the most you can put into a 401(k) is $23,000 for employee contributions.

If you are 50 or older, your contribution limit is $30,500 for employee contributions.

*Your company match is not included in these employee contribution limits.* 3

Control of Your Investments

With a 401(k), your company usually controls the investments you can choose.

This means you may have limited choices to what you can invest in.

Always good to look at the full plan to make sure you are finding low-cost choices that fit your risk.

Vesting

Any money that you contribute to a 401k will always be yours, but money that your employer puts in may be yours only after a certain amount of time.

Some companies may require a few years of working there before you are fully vested.

 

 

  1. I am 50 Years old and have no Retirement Savings. Yahoo Finance. July, 2023 https://finance.yahoo.com/news/50-no-retirement-savings-turned-150038852.html
  2. What is the Average 401K Employer Match for 2024? https://carrymoney.com/learn/average-401k-employer-match#:~:text=A%20study%20by%20the%20Plan,on%20top%20of%20your%20salary.
  3. 401 (k) limit increases to $23,000 for 2024. gov. November, 2023 https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000#:~:text=Highlights%20of%20changes%20for%202024,to%20%2423%2C000%2C%20up%20from%20%2422%2C500.