Confused About Your 401(K)? No Worries, We Got You.
Previously Published on Vivala
The first day of a new job is overwhelming and full of paperwork and decisions. Among those decisions is the option to join your company’s 401(k) plan. Most people just sign the bulk of documents and feel grateful that they are doing the right thing investing for retirement. The problem is that enrollment is only step one in the 401(k) process and you should have a handle on the terms and choices you will need to make.
Because there is a lot of confusion about retirement plans and the different vehicles used to save money, let’s tackle what the most common type of 401(k) plan is, also known as a defined contribution plan — where the employer and employee or both make contributions on a regular basis.
After enrollment, the first decision to be made is how much to contribute every pay period. This contribution will be automatically deducted from your paycheck and invested. For many people, this pre-tax feature of the 401(K) is a key because it essentially lowers your tax liability for the year. With a 401(k), taxes are paid when you withdraw the money later in life. There are other employer defined contribution plans including, a 403(b) – for nonprofit organizations; 457 – for state and municipal employees; Thrift Savings Plans (TSPs) – for federal employees.