What is a 401k?

A 401k is an employee contribution fund provide by an employer that is a tax-advantaged retirement savings plan. How it works is that you choose your investments from a range of investments that are either conservative or aggressive options within the plan. Once you have your plan, your contributions will automatically be put into the investment plan. Plans differ from company to company and some company's match employee contributions. The 401k name comes from the U.S. Internal Revenue Code (IRS) since section 401 goes over the employer contribution funds.  

There are two major types of 401k's-

Traditional: employee contributions are before taxes, which reduces taxable income. The catch is once you withdraw during retirement you are taxed on the withdrawals.

Roth: employee contributions are after-tax. Once you withdrawal during retirement you will not have to pay any additional taxes on contributions or investment earnings.

The 401k plans do come with contribution limits each year. The maximum amount an employee can add each year changes and is adjusted periodically based on inflation.

The maximum you can add as of 2025 is:

• For workers under 50 years old, they can contribute $23,500
• For workers 50 years or older, they can contribute $31,000                                    ($7,500 catch-up contribution)

What can I do if I leave my employer and 401k plan?

1. Withdraw Money: Not recommended unless urgent. Money will be taxable for a traditional 401 and will be hit with a 10% early distribution tax unless you are 59 and half or permanently disabled. With a Roth, you can draw contributions tax-free and have no penalty if you have had the account for longer than 5 years.
2. Roll Your 401k Into an IRA: Moving your money into an individual retirement account (IRA) that is offered by a bank or broker, yet there are very strict rules on rollovers.
3. Leave Your 401k With Your Former Employer: You will not be able to contribute to the account anymore: therefore, if the account is smaller than $5,000 the employer may give you no choice but to move the money. 
4. Move 401k to Your New Employer: This is the best option to use your old 401k balance since it keeps all of the tax benefits and maintains your 401k balance. 

If you have a question I recommend Investopedia (website and article in cite) for more information on 401(k)s. If you need anything else or questions answered please reach out to awbrendtke@gmail.com !

"Wealth is obtainable, you just have to go a little westward"

Cites:

Fernando, Jason. “401(k) Plans : What Are They, How They Work.” Investopedia, Investopedia, 24 Jan. 2025, www.investopedia.com/terms/1/401kplan.asp#toc-how-401ks-work.

Levy, Adam. “The 7 Benefits of a 401(k).” The Motley Fool, 2 Nov. 2024, www.fool.com/retirement/plans/401k/benefits/.

Park, Meeyeon. “401(k) Plan.” Corporate Finance Institute, 21 Dec. 2023, corporatefinanceinstitute.com/resources/wealth-management/401k-plan/.