401k For Dummies: A Pocket Guide To Successful 401k Investing
If you’re looking for information on “401k for Dummies” – I wouldn’t really call you a dummy. You’re smart enough to search for information about how 401k plans work, which puts you ahead of the pack my friend.
Indeed, most Americans have pretty much no idea what’s going on in their 401k. That’s why I wrote this. To help you shed some light on the situation.
Common questions about 401k plans.
I’m changing employers – how do I roll my 401k into an IRA? This is the most common question.
How much should I contribute to my 401k? There are limits based on your plan & your salary.
What’s the difference between a 401k and an IRA? The “I” in IRA stands for Individual. That’s one of a few other important distinctions.
Other 401k information you should know
401k plans are a way to save for retirement. Let’s start from the top (in true 401k for dummies fashion)… a 401k is a way to save for retirement, usually offered through an employer.
Sometimes, the employer makes contributions (i.e. puts money into) this account on your behalf.
This contribution usually comes only when YOU contribute to the account also–that’s called a “matching” contribution. It’s when your employer puts money into your 401k on top of what you put.
The amount your employer matches is up to them. Your employer can contribute as much or as little as they want. In fact, they can contribute none, and often-times do.
Here’s an excellent tip for a 401k for dummies article with regards to employer matching–if they offer a match, max it out. That means contribute as much as you can up to the limit of matching. Most of you probably know what I mean. If you don’t, contact me and I’ll tell you.
Your 401k doesn’t belong to you. Even though you think your 401k is yours, you’re about to learn something funny in this 401k for dummies article. Your 401k is administered through your employer. If you ever want to get money out of it, you’re going to have to go through your employer.
When you leave your employer and you want to roll your 401k into an IRA, you have to go through your employer. If you ever want to get a loan from a 401k, you have to go through your employer. Your employer all but owns your 401k.
It’s an account where you buy investments. Your 401k isn’t what you’re actually investing in. It’s just the account that holds what you’re actually investing in. What you’re actually investing in are the investments which are held in your 401k. Most times this is mutual funds. How do mutual funds work?
Be careful taking your $ out before you turn 59 1/2. Let’s say you have invested $50,000 into your 401k over the last 10 years. You have earned some returns (yea right in this market *2009) and now the total balance of the account is $60,000, say. You will have to pay taxes and/or penalties on any amount you withdraw, no matter how you slice it almost.
If that’s something you’re okay with, fine by me. But I’ve always hated paying penalties. I would rather just read or otherwise learn about something, then go and actually do it the right way. But definitely I wouldn’t attempt taking money out of a 401k if you haven’t properly educated yourself on the matter.
More on 401k early withdrawal rules here – That is of course, unless you meet one of the exceptions (see further reading below)
Having read this, you’re more in-the-know than most with regard to 401k for Dummies. But there are undoubtedly more questions you have to be answered. I will attempt to provide more resources to some of the most frequently asked questions below. If you can’t find the answer to your question, feel free to contact me personally or do another Google search : )