Question 1

What is a 401(k) and how does it work?

Accepted Answer

A 401(k) is an employer-sponsored retirement savings plan. You contribute a portion of your pre-tax salary, which reduces your taxable income. The money grows tax-deferred until withdrawal in retirement, when it is taxed as ordinary income.

Question 2

How much should I contribute to my 401(k)?

Accepted Answer

At minimum, contribute enough to get your full employer match - this is free money. Financial experts generally recommend saving 10-15% of your income for retirement. The 2025 contribution limit is $23,500, plus $7,500 in catch-up contributions if you are 50 or older.

Question 3

What happens to my 401(k) if I leave my job?

Accepted Answer

You have several options: leave it with your former employer (if allowed), roll it over to your new employer plan, roll it into an IRA, or cash it out (not recommended due to taxes and penalties). Your contributions are always yours; employer matches may be subject to vesting.

Question 4

When can I withdraw from my 401(k) without penalty?

Accepted Answer

You can withdraw penalty-free at age 59½. Early withdrawals typically incur a 10% penalty plus income taxes, though exceptions exist for hardship, disability, or substantially equal periodic payments (SEPP).

Question 5

Should I choose Traditional or Roth 401(k)?

Accepted Answer

Choose Traditional if you expect to be in a lower tax bracket in retirement - you get a tax break now. Choose Roth if you expect higher taxes in retirement - you pay taxes now but withdrawals are tax-free. Many people benefit from having both.

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Understanding 401(k) Retirement Plans

Frequently Asked Questions

What is a 401(k) and how does it work?

How much should I contribute to my 401(k)?

What happens to my 401(k) if I leave my job?

When can I withdraw from my 401(k) without penalty?

Should I choose Traditional or Roth 401(k)?

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