Key ideas

1. Money goes in before you see it. You choose a percentage of pay. Your employer moves it into the account each payday, so saving takes no willpower.
2. A traditional 401(k) lowers your tax today. In the example, Sam puts in $100 a paycheck but his take-home drops only $88, because he pays $12 less federal tax.
3. The account is for after age 59½. Early withdrawals usually cost income tax plus a 10% extra tax. Money you put in stays yours when you change jobs.

Vocabulary

401(k)

A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.

Stock

A small piece of ownership in a company. Its price rises and falls with how investors value the business.

Bond

A loan you make to a government or company. It pays you interest and returns your money on a set date, called the maturity date.

Target-date fund

One fund that holds a mix of stocks and bonds and slowly shifts toward bonds as the year in its name gets closer.

Index fund

A mutual fund or ETF that tries to match a market index by holding the investments in it, rather than picking winners.

Emergency fund

Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.

Work it out

Sam earns $52,000 a year, paid $2,000 every two weeks. He puts 5% into a traditional 401(k). His top federal tax rate is 12%.

1. 401(k), 5% of $2,000
2. Federal tax saved at 12%
3. Drop in take-home pay
4. Paychecks a year
5. Into the 401(k) a year
6. Federal tax saved a year
7. Cost to Sam's take-home

Check yourself

1. You earn $1,800 a paycheck and choose 5%. How much goes into your 401(k) each paycheck?

   • A. $9
   • B. $90
   • C. $180
   • D. $900

2. What happens to the money you put in your 401(k) when you leave your job?

   • A. Your employer keeps it
   • B. It is paid out to you as cash automatically
   • C. It stays yours, and you can leave it or move it

3. With a traditional 401(k), when do you pay income tax on the money?

   • A. When you take it out
   • B. Before it goes in
   • C. Never

Your turn

Log in to your benefits portal and find your 401(k). Check three things: your contribution percentage, which fund your money is in, and who your beneficiary is. If you are not enrolled, sign up at 3% or the match level, whichever is higher.