401K information?

[myhoneyswife]

I just signed up for the 401K at work. I have a whopping $16.92 in it and I have NO idea what it's about. I have 2% taken out of my not so huge paycheck and my employer matches it.

Can anyone give me any info on what exactly this is about?
When can I take out the money without penelties?
What would happen if I quit my job or was layed off?
What if I died?

Um, what else? I don't know. I know I don't pay taxes on it now, but will when we pull out, and I invested in mutual funds that were pretty conservative, at least from what it showed on the sheet they gave me.

For what it's worth, I'm 23, hubby's 25, and we're mostly working on getting out of debt and not so much retirement but I figured this was better than nothing, since it really hardly impacts my paycheck at all.

Thanks!
Cara

[msjd123]

Originally Posted by myhoneyswife

Can anyone give me any info on what exactly this is about?
When can I take out the money without penelties?
What would happen if I quit my job or was layed off?
What if I died?

A 401k is a tex-deferred way of saving for retirement. Tax-deferred means you don't have to pay taxes on it right now, but you will when you retire and start pulling the money out. At that time, you'll pay income taxes on anything you take out, so that means the principal plus all of your earnings. Until that time, you don't pay any taxes on it whatsoever. So, say you hit the jackpot and one year you earn 25% on your money -- that's fantastic, but your money still gets to grow without being hit by taxes until you start taking withdrawals.

You can only take the money out without penalties when you are 60 years old. (Actually, it' sometimes 59.5, but just to make things easier, we'll say 60.) If, for some reason, you take money out before then, you will pay a 10% penalty plus income tax plus you have to pay yourself back with regular money, not pre-tax money. PLUS, you're losing out on all that wonderful compund interest. So, when all is said and done, you should NOT take money out of your 401k unless you are in dire, dire circumstances.

If you quite your job or are laid off, you can usually keep your money where it is, or you can roll it into a different account. Sometimes, the easiest thing to do is just to roll it into an IRA, but depending on your employer's policies, you'd have to look at your options.

If you die, the account will go to your beneficiary. Since you're married, that probably means your DH, but you should make sure you have filled out a form that names your beneficiary(ies). If you haven't done that, ask for the form from your employer.

Oh, and one last thing: You're very lucky that you employer matches your contributions. In order to get the best possible "deal," you should contribute up to what they match. So, if their policy is that they match the first 6%, then contribute 6%! It's like getting free money, and right away, you're getting a 100% return on your money. What could be better than that???

[msjd123]

One more thing: At your age, don't worry about staying with conservative investments. You have a lot of time on your side, and you can afford to invest aggressively. Assett allocation -- i.e. where you decide to invest your money and how you spread it out amongst various mutual funds -- is the #1 predictor of investment returns. You may want to check out a basic guide to investment from the library, but almost any book will advise you to invest as aggressively as you can stand to.

Just as an example, here is my assett allocation. I am 28, my dh is 32, and I have been investing since I was 21. I stick to index funds for a variety of reasons, so these are almost all index funds:
30% S&P 500 Index (mostly large-cap)
30% Extended Market Index (most mid and small-cap)
20% International Fund (an almost-index of major international companies)
20% Emerging Markets

"Cap" as in large-cap refers to the size of a company. Microsoft, for example, is a large-cap company. Small-caps and large-caps tend to perform differently at different times, so those first two funds complement each other. The second two would be considered aggressive or high-risk, but we have 30 years to go until we retire. This year, they're both doing great; we've made 23% on them. They could tank next year, though, and we'll still hold them and buy more because eventually they'll go back up again. That's the beauty of being young when you start investing!

[myhoneyswife]

Thanks! That clears up a lot As for the matching... yeah... ideally we'd do to the cap they matched, but at the moment we're struggling to pay bills in a major way, so I can't really let it impact my paycheck. Ahh. But it's a goal!

Cara

[shelbean91]

The nice thing about 401k is it reduces the amt you are taxed on, so if you are contributing $100 to your plan, you only miss about $80 each paycheck, b/c your taxability is reduced.