A 401k is a retirement savings account offered through your employer. It's often the best place to start because of one magic words: employer match.
The Employer Match
Many employers will match a percentage of your contributions. Common matches:
- 100% match up to 3%: You put in 3% of salary, they add 3%
- 50% match up to 6%: You put in 6%, they add 3%
- Dollar-for-dollar up to 4%: You put in 4%, they add 4%
This is free money. A 100% match is literally a 100% instant return on your investment.
If you earn $50,000 and your employer matches 100% up to 3%:
- You contribute: $1,500 (3%)
- Employer adds: $1,500
- Free money per year: $1,500
Not taking the full match is leaving money on the table.
Tax Advantages
Traditional 401k contributions are pre-tax, meaning:
- You contribute $1,000
- Your taxable drops by $1,000
- If you're in the 22% , you save $220 in taxes immediately
- Your money grows tax-free until retirement
- You pay taxes when you withdraw
This is powerful, especially when combined with over decades.
How to Use Your 401(k)
Step 1: Contribute Enough to Get the Full Match
This is non-negotiable. If your employer matches 4%, contribute at least 4%.
Step 2: Choose Your Investments
Most offer:
- Target date funds: Pick the year closest to when you'll retire (e.g., Target 2055). The fund automatically adjusts as you age. Simple and effective.
- : Low-cost funds that track the market
- Individual funds: More complex, usually not necessary
When in doubt, choose the target date fund. Done.
Step 3: Increase Over Time
Start with enough to get the match. Then increase by 1% each year (you won't notice). Aim for 10-15% eventually.
What If You Change Jobs?
You have options:
- Roll it over to your new employer's 401(k)
- Roll it over to an (often has more investment options)
- Leave it at your old employer (usually OK but can get complicated)
- Cash it out — DON'T DO THIS (you'll pay taxes + 10% penalty)
Common Questions
"What if I need the money before retirement?" There's a 10% penalty for early withdrawal plus taxes. This is intentional—it's retirement money. Keep your separate.
"Traditional or Roth 401(k)?"
- Traditional: Tax break now, pay taxes later
- Roth: Pay taxes now, tax-free in retirement
If you're young and in a low tax bracket, Roth is often better. If you're in peak earning years, Traditional is often better.
"How much should I contribute?" Minimum: Enough to get full employer match Goal: 10-15% of income Maximum (2024): $23,000 per year
The Bottom Line
- If your employer offers a match, take it (it's free money)
- Choose a target date fund (keep it simple)
- Increase contributions over time
- Don't touch it until retirement