401(k) Retirement Planning
A 401(k) is an employer-sponsored retirement account offering tax advantages and often employer matching. Contributions are pre-tax, reducing your current taxable income, and investments grow tax-deferred until withdrawal in retirement. The 2024 contribution limit is $23,000 ($30,500 if age 50+), though most people contribute a percentage of salary.
Employer matching is free money - always contribute enough to receive the full match. If your employer matches 5% and you earn $75,000, contributing 5% ($3,750) gets you an additional $3,750 from your employer. That's an instant 100% return before any investment growth. Not taking the full match is literally leaving money on the table.
Start early and increase contributions annually. A 30-year-old contributing 10% of a $75,000 salary with 5% employer match and 8% returns will have over $2.3 million at 65. Waiting until 40 yields only $950,000 - that decade costs $1.4 million. Automate increases with annual raises so you won't miss the money, gradually working toward 15-20% total contribution rate.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
At minimum, contribute enough to get full employer match. Aim for 15-20% of gross salary including employer match for comfortable retirement. Start with what you can afford and increase 1-2% annually with raises.
Most experts recommend target-date funds matching your retirement year, or a simple three-fund portfolio: 70-90% stock index funds, 10-30% bond index funds. Younger investors should favor stocks for growth.
Withdrawals before age 59½ incur 10% penalty plus income tax, with exceptions for hardship, disability, or Rule of 55. Consider 401(k) loans instead (borrow from yourself), though this has risks if you leave your job.
Contributions are after-tax (no current deduction) but withdrawals in retirement are tax-free. Good for young workers in low tax brackets now who expect higher brackets in retirement. Some employers offer both traditional and Roth 401(k) options.
You can roll it to your new employer's 401(k), roll to an IRA (often providing more investment options), leave it with the old employer (if balance exceeds $5,000), or cash out (avoid this - taxes and penalties).