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401(k) Basics

(Start Young)

Workplace retirement plans, such as 401(k) accounts, make it easy to invest for the long term. You don’t have to find a brokerage or do much to set up your own account. All you have to do is tell your employer how much to take out of your paycheck, and then pick your investments.


Typically, 401(k) plans invest in a portfolio of mutual funds, stocks and bonds. Target-date funds are popular because they automatically adjust investments to be riskier when you’re younger, and less risky as you get older.


You fill out a salary reduction agreement that tells your employer how much to take out of your paycheck to invest in your 401(k). Usually this is a percentage (like 3%). You can contribute up to the yearly limit ($18,500 for 2018). Many employers offer matching contributions, so if you put in 3%, your employer will match you by adding another 3%. Don’t miss out on that free money.


Your employer directly deposits your contributions into your 401(k) before taxes are taken out. You pay taxes when you withdraw the funds.

You can start withdrawing from your 401(k) without penalty at age 59 ½, and you are required to start withdrawals at age 70 ½.


If you choose to take this money out early, you often must pay large penalties and taxes. There are some situations when the 10% early withdrawal penalty is waived, including:

  • Excessive medical bills
  • Unemployment
  • Disability
  • Divorce
  • Military service

It’s best to research thoroughly and consult a financial advisor before initiating any withdrawal from a retirement account. There are additional exceptions for non-401(k) IRA withdrawals.


Only tax-exempt 501(c)(3) organizations can offer 403(b) plans. So, if you are entering a career as a teacher or school administrator, librarian, researcher, doctor, nurse, clergy or nonprofit professional, you may have a 403(b) as part of your benefits package. 403(b) retirement plans operate similarly to a 401(k). But don’t make any assumptions. Research your specific plan.


If you don’t have a workplace retirement account, you still can invest on your own. Anyone with a job can open an IRA and if you don’t have much to start with, there’s always the option of robo-advisors and microinvesting. However you choose to invest, start as soon as possible and watch out for high management fees. Research expense ratios and average brokerage fees, especially if you get to choose among several brokerage firms.

As always, we’ve got your back. — The On Your Own Team End of article insignia



[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by On Your Own, the National Endowment for Financial Education or any of its affiliate programs.]