Retirement planning doesn’t have to be complicated. Here’s everything you need to know about 401(k) plans in bite-sized pieces.
What is a 401(k)?
A 401(k) is your employer’s retirement savings plan that: • Takes money from your paycheck before taxes • Lets that money grow tax-free until retirement • Often includes FREE money from your employer (matching) • Is one of the easiest ways to build wealth
Bottom line: It’s a tax-advantaged piggy bank that your employer helps fill.
Traditional vs. Roth 401(k): Quick Comparison
| Feature | Traditional 401(k) | Roth 401(k) |
|---|---|---|
| Tax on contributions | No tax now | Pay tax now |
| Tax on withdrawals | Pay tax later | No tax later |
| Best for | Higher earners | Young workers |
| Immediate benefit | Lower taxable income | None |
| Retirement benefit | Taxable income | Tax-free income |
2024 Contribution Limits (The Numbers You Need)
| Age Group | Maximum Contribution |
|---|---|
| Under 50 | $23,000 |
| 50 and older | $30,500 ($7,500 catch-up) |
Employer Matching: FREE MONEY Rules
Common matching formulas: • 100% match up to 3% of salary • 50% match up to 6% of salary • Dollar-for-dollar up to $1,000
Golden rule: Always contribute enough to get the full match. It’s literally free money.
Example: If you earn $60,000 and your employer matches 50% up to 6%: • You contribute: $3,600 (6% of $60,000) • Employer adds: $1,800 (50% of your contribution) • Total saved: $5,400
Investment Strategy Made Simple
Age-Based Approach
• 20s-30s: 80-90% stocks, 10-20% bonds • 40s: 70% stocks, 30% bonds • 50s: 60% stocks, 40% bonds • 60s+: 50% stocks, 50% bonds
Easy Option: Target-Date Funds
What they do: Automatically adjust your investments based on when you plan to retire
Why they’re great: • Set it and forget it • Professional management • Automatic rebalancing • Perfect for beginners
Withdrawal Rules: When You Can Touch Your Money
| Situation | Age Requirement | Penalty |
|---|---|---|
| Normal retirement | 59½ or older | None |
| Early withdrawal | Under 59½ | 10% penalty + taxes |
| Hardship withdrawal | Any age | 10% penalty + taxes |
| Required distributions | 73 or older | Must withdraw minimum |
Limited Exception for Early Withdrawals:
• Medical expenses • Preventing home foreclosure • Educational costs • Warning: These hurt your retirement savings significantly
Vesting: When Employer Money is Really Yours
Vesting schedule example: • Year 1: 0% vested • Year 2: 25% vested • Year 3: 50% vested • Year 4: 75% vested • Year 5: 100% vested
Your contributions: Always 100% yours immediately
Action Steps: What to Do Right Now
Step 1: Sign Up
• Contact HR or log into your employee portal • Enroll in your company’s 401(k) plan
Step 2: Contribute for the Match
• Find out your company’s matching formula • Contribute at least enough to get the full match
Step 3: Choose Investments
• Beginner: Pick a target-date fund • Intermediate: Build a diversified portfolio • Advanced: Consider index funds for lower fees
Step 4: Automate and Increase
• Set up automatic contributions • Increase by 1% each year • Bump up contributions when you get raises
Quick Wins to Maximize Your 401(k)
Start Early
$200/month starting at age 25 = $525,000 at retirement $200/month starting at age 35 = $246,000 at retirement Waiting 10 years costs you $279,000
Increase Gradually
• Start with enough to get the match • Increase by 1% annually • Use raises to boost contributions
Don’t Cash Out When Changing Jobs
• Roll over to new employer’s plan • Move to an IRA • Never cash out (you’ll pay taxes and penalties)
Common Mistakes to Avoid
• Not contributing enough for the match – You’re leaving free money on the table • Cashing out when changing jobs – Massive tax hit and lost growth • Being too conservative – Inflation eats conservative investments • Not increasing contributions – Your future self needs more money • Trying to time the market – Time in market beats timing the market
The Bottom Line
Your 401(k) is probably the most powerful wealth-building tool you have access to. It combines tax advantages, employer matching, and compound growth to help you retire comfortably.
Three things to remember:
- Start now – Even $25/month makes a difference
- Get the match – It’s free money
- Stay consistent – Small amounts over time create big results
The best time to start was yesterday. The second-best time is today.
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