401k Basics That Every New Investors Should Know

This is a living, breathing document that I will be continuously update as I learn new information.

Disclaimer: I am not a financial expert. This is information that I have learned through personal research. I will do my best to include sources for information that I have obtained.

I got my full time job and it came with a 401k benefit

My 401k retirement account is my first and only investment account at this time. It is the most convenient retirement account because it is linked directly to my employer. My contributions are automatically withdrawn from my paycheck and sent directly to my 401k every pay period.

Since I am contributing to my 401k, I decided to learn more to ensure that I maximize my returns from this account.

What is a 401k?

A 401k is a employer-sponsored retirement account which you contribute pre-tax dollars. The money you contribute goes directly from your paycheck to your retirement account so you never actually touch this money. It is out of sight, out of mind.

The only way to have a 401k is if your employer offers one. If your employer, does not you will need to look into other retirement vehicles such as a IRA (individual retirement account).

Who determines how much you contribute to your 401k?

When I was hired at my job, I was automatically set to contribute 3% of my income to my 401k. To change that contribution amount, I needed to contact my plan provider to increase or decrease my contribution amount. I recently increased my contribution to 6% of my salary. I go into more detail about why I did that in my Increasing My Contributions to My 401k post.

Another cool feature that my 401k has is that it will automatically increase my contribution by 1% every year.. This is a nice feature that makes it easier to build the habit of saving for retirement over time.

Ultimately, it is up to you how much money you contribute your 401k. To change it from the default contribution amount, you will need to contact your plan administrator or utilize their website to update that info.

The contribution amount that your 401k is set to will vary from employer to employer. Upon hire, many employers provide you with a packet to give your more details about your 401k plan. If you don’t have access to that information, reach out to your HR department.

What are the benefits of a 401k?

  • The first benefit is your 401k is provided through your employer so you don’t have to do research about which brokerage to use because your employer decides on the plan administrator. An example of a brokerage is Fidelity, Vanguard, etc.
  • You can contribute pre-tax dollars to your 401k and that reduces your taxable income. It is possible that you could end up paying less taxes upfront because you appear to have less income.
  • Many employers match a percentage of the contributions you put in your 401k. That is easy money to build up your 401k balance quicker.

At what age can you withdraw from you 401k?

You can begin withdrawing from your 401k penalty free at the age of 59 1/2.

What is the most you can contribute to your 401k in a year?

The amount you are able to contribute to your 401k varies by year. The IRS determines the maximum amount an employee can contribute to their 401k. For the year of 2021, the maximum an employee can contribute to their 401k is $19,500. This does not include the employer match.

How much do you need to save for retirement?

This varies from person to person. Retirement helps you maintain your current standard of living when you no longer work.

I have found some retirement calculators that have been useful. Looking at these retirement calculators will put into perspective what you need to do to be able to retire on your terms.

The earlier you start saving for retirement the better. It allows compound interest more time to work to build up the nest egg for retirement.

Vangaurd Retirement Calculator

NerdWallet Retirement Calculator

Resources:

401k Plan Overview| IRS

5 Benefits of Investing in 401k plan| John Hancock

401k Contribution Limits for 2020 vs. 2021