How does 401(k) work?

Question

I have heard of it before but I'm not familiar with it. I just graduated from college recently, and I just started a new job at AT&T, and it offers a 401(k). What is it, and what are the advantages and disadvantages of a 401(k)?

Answer 1

well in most things i do people say that k is worth a thousand but im not sure it would be 401 thousand

Answer 2

Check with your HR department.

Basically, you contribute into an account on a pretax basis, and the company will match a portion.  The contribution and its growth is tax deferred until you withdraw it.  If you withdraw before the retirement age you will have to pay a penalty.  Of course, there are many restrictions and parameters to this scheme.  For general info, Google it, for specific ones, see your HR./

Answer 3

As many have already responded, a 401(k) is a tax-advantaged account that allows you to save for retirement.  In some circumstances, you can use the funds before retirement for purposes such as medical expenses, higher education, or a first-time home purchase.  (If you leave your job and roll over the 401(k) into a traditional IRA.)  You can also borrow against your 401(k), but I don't recommend that you do so unless you are facing a severe financial emergency.

Most 401(k) arrangements allow contributions from pre-tax dollars, which means your paycheck will be reduced by less than the amount of your contribution because you'll pay less taxes.  While this offers one type of advantage (allows you to contribute more), your best option is something new called a Roth 401(k).  

With a Roth 401(k), you pay from post-tax dollars, but all your earnings will be tax free if you make only qualified withdrawals in the future.  Over time, most of the money in your 401(k) will be earnings, due to the power of compounding.

Not all employers offer Roth 401(k) accounts, so you'll need to check.  In any case, it's definitely to your advantage to contribute at least as much as you'll need to earn an employer match, if offered.  An employer matching contribution is equivalent to earning a 100 percent return on your investment.

Congratulations on your new job and college graduation!  Best wishes.

Answer 4

Tax deffered investment, a percentage of your pay goes into an investment account and the earnings and growth on that money in the 401k, grows over time and is a retirement account for you, companies match your contributions.

The advantages are is that the money goes into the 401k before the pay is taxed. It becomes a retirement account and save you on income tax and helps to grow a savings account for your retirement.

Really no disadvantages

Answer 5

A 401k is an income tax deferment plan for retirement savings. Whatever portion of your income you put in there, you don't pay tax on. And you company puts money in too, when you put money in. They may put 50 cents to your dollar, or 25 cents to your dollar.

However, it is NOT a savings plan. It is an investment of stocks and mutual funds on Wall Street, and is subject to fluctuations and turbulence in the market.

Answer 6

It is a retirement account.

It is never to early to begin funding your retirement.

You put money from your paycheck in to the account.  Usually, your employer puts money in also (The Match).

You take it out when you retire.