Most search sites I’ve tried either give me advertisements or complicated definitions about what a 401k plan is. Could someone give me a more basic definition? As I understand it now, it’s a retirement plan in which the person buys stock?
Not exactly. Some companies may offer a stock-purchase option in their 401(k), or sometimes there is a self-directed brokerage option in which you can use part of your balance to purchase stocks on your own. That’s not a requirement however, and I personally have never worked anywhere that offered either of those options.
A 401(k) is a type of retirement savings plan that a company sets up and allows its employees to participate, subject to certain conditions (age, length of service, etc.). The employee is allowed to put a certain percentage of his pay into the plan pre-tax; thus, at the end of the year if you grossed $50K but put $10K into the 401(k), then you only pay income tax on $40K. (Once you retire and start taking the money out, you pay taxes on all that deferred income; presumably most people are in a lower tax bracket at that point and so pay less in taxes than they would have when they originally made the money.) Some companies match some or all of what the employee defers.
If your company offers one, get in it as soon as you are eligible. Even if they don’t match anything, the Magic of Compound Interest, plus the (hopefully) good-to-possibly-fantastic rate of return will soon make your fund balance grow.
From the MSN page
401(k) Plan
A deferred compensation plan set up by an employer. A portion of your earnings is deducted and placed in a qualified retirement plan. Your employer may match a percentage of the amount you have withheld. You are not taxed on either the amount deducted from your pay or your employer’s matching amount until you receive distributions, usually at retirement.
From moneychimp
401(k)
A retirement plan made available by a company to its employees, featuring tax-deferred contributions and growth. The plan may also include matching contributions by the company.
Caveat: many 401(k)s invest in the company’s own stock; if the company has a bad enough year you could lose both your job and your retirement savings. So you need to diversify your retirement account, even if you do take advantage of a 401(k).
From Militaryhire
401(k)
A retirement plan made available by a company to its employees, featuring tax-deferred contributions and growth. The plan may also include matching contributions by the company.
Caveat: many 401(k)s invest in the company’s own stock; if the company has a bad enough year you could lose both your job and your retirement savings. So you need to diversify your retirement account, even if you do take advantage of a 401(k).
I’ve been involved with 3 401(k)s so far and they all have a range of investments from conservative to risky.
Typically, you assign a percentage of your pre-tax withholdings to the investments that you pick. For instance, you might assign 25% to the super-conservative fund, 10% to company stock, 15% to some high risk fund, and spread the remaining 50% amongst the medium risk funds. You can usually adjust your assignments if you want to invest more consevatively for a time, or more risky for a time.
I’ve always withheld at least enough so that I get the maximum match from my company. For instance, if my company matches up to $2500 a year, then I’ll make sure that I withhold enough to get all that. It’s $2500 that I wouldn’t have gotten otherwise.