A 401(k) is a plan that allows you to defer — or, in human English, set aside — money from your paycheck into a 401(k) account and invest it. The idea is that the value of the stocks and bonds you invest in, hopefully, go up over the years you spend working.
You don't pay any federal tax on the money you set aside (or, when the market climbs, the money you earn) until you actually withdraw it. When you do take that money out, the tax rate at that time is the rate that applies. INKED UNION handles setting aside this money by automatically taking it out of your pay.
What Are My Contribution Limits?
A word of caution: Plans vary. Minor exceptions are all over the place. Retirement plans can get as complex as the needs of the people trying to save their money. Also, companies sometimes match your contributions with their own cash, but they contribute shares in the company itself. That can be risky if your plan isn't diversified enough, and the company's stock tanks.
But generally you can dial up or down how much of your pay you put into your 401(k) account — the thing that contains the money you've invested. You can't access any of this money before age 59-1/2 unless you're willing to stomach a penalty.
As of 2019, if you're under age 50 have a 401(k) plan set up through your job, you can put up to $19,000 of what you get paid into your account. At age 50 and above, you can contribute up to $25,000.
What Is A 401(k) Administrator?
A 401(k) administrator — like T. Rowe Price — oversees your actual 401(k) account. Those administrators make sure that the money from your paycheck is invested according to your demands. They also offer information about the money in your 401(k) account or changes to your plan, and can answer questions you might have about the plan.
For many plans, you can go online to a website overseen by the administrator, and decide how much money you want to take out of your paycheck and put into your 401(k). With a Fidelity account, for instance, Fidelity would send your request to the payroll company INKED UNION will use to give you your paycheck.
Say you wanted to put $10 worth of every paycheck you get into your 401(k). Before you get your paycheck, the payroll company takes that $10 and sends it to the 401(k) administrator. From there, the 401(k) administrator sends that $10 off to be invested.
How Does A 401(k) Work And, Hopefully, Grow?
Say you get paid $100 every week, and you want to set aside 10% of your gross pay and put that money into a 401(k). Ten percent, in this case, is $10. That $10 — the pretax money — would be put into your 401(k) account. On your paycheck, for federal taxes at least, you'd only be taxed as if you made $90. As for state taxes, it depends on the state; FICA taxes still dock you as if you made $100.
The administrator puts that $10 into an investment portfolio, often a fund of some kind. Basically that fund is a big pile of money overseen by a fund manager who invests it according to certain criteria.
The administrator allows you to choose from several investment portfolios. You can choose one that best suits your tastes. But you have to ask yourself: "What is a 401(k) risk profile that I'm OK with?"
Funds invest in a mixture of stocks and bonds. They are designed to do different things, depending on what you want. Some are more aggressive, taking on bigger risks with stocks of younger, smaller companies for potentially bigger reward. Some are more pedestrian, a bit more heavy on bonds, but are less likely to startle you with massive heaves in the market.
What Does A 401(k) Stand For?
The 401(k) is named after the section of the IRS code, added in 1978, that allows an employer to create a retirement plan that employees can put pretax money into.
The first 401(k) plan was born in 1981, after Ted Benna tried using that IRS tax code section for Johnson Cos., a benefits consulting company in Pennsylvania he co-owned.
This all may seem far away. If you haven't saved anything, you're not alone. Forty-five percent of people in the U.S. haven't saved a penny toward retirement. But time is dumb and unfair. And it moves much faster the older you get.
