What’s What When it Comes to 401(k)s

What is a 401(k)?

A 401(k) is a tax-exempt, employer-based retirement savings account. When you contribute to a 401(k) your taxable income lowers and the money in your retirement savings account grows tax-free, meaning more of your income stays in your pocket.

How Does my Money Grow in a 401(k)?

You can select how much of your salary you want to invest in your 401(k). Some companies use auto enrollment at default rates, but it’s recommended that you contribute 12% to 15% of your salary per year to ensure you have a sufficient amount before retirement.

Some employers offer contributions matching up to a certain percentage. Don’t leave money on the table. Your company may offer multiple fund options, and it’s up to you to determine which of those will pay you back the most.

When Can I Pull My Money Out of My 401(k)?

It’s best to wait until you’re 55 to tap into your 401(k) savings account penalty-free, otherwise you will be charged a 10% early-withdrawal penalty. If you leave your job before retirement, make sure you roll your money directly into a new 401(k) or IRA so the amount will not be taxed. When you get to age 70 ½, the government will require you to start pulling money out of the 401(k) for retirement.