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Guest Post: A Beginners Guide To 401K Plans

My Strategic Dollar Guest Posts, Investing 20 Comments

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Today I have a second guest post from Bob Wheeler over at The Money NerveBob Wheeler is a certified CPA with more than 25 years experience, CEO of The Comedy Store, an LA-based landmark and author of the book, The Money Nerve: Navigating the Emotions of Money. Learn more about his simple concept of creating a life of proactive abundance. In this post Bob will be giving you a quick guide to the 401k. Enjoy! 

What is a 401k?

Essentially, a 401k is a retirement savings plan sponsored by an employer. This plan allows workers to select whether they want a larger paycheck now or to defer some of their money by saving and investing a portion of revenue from their paycheck before taxes are taken out. Different from pension plans where companies managed employee’s assets, 401k’s give workers more autonomy to manage their retirement funds.

Matching Funds, Take It!  It’s Free Money.

Many companies also match contributions, often with a 3% or 6% cap. With this type of 401k account, taxes are paid when a person begins to withdraw money. If you put in 3% of your $50,000 salary, or $1,500, your company puts another $1,500 in the pot. You can add more than that $1,500 yourself, but the company won’t match beyond 3%.

That’s a 100% return on your 3% investment! Try to beat those odds.

What Is The Best Type Of 401k To Open?

Choosing whether to use a Roth 401k or a Traditional 401k is often determined by age and by salary level.Click To Tweet

If you are in a higher tax bracket, you may prefer lowering your salary by investing now and paying taxes later, thus the traditional approach may work best. For many people already in a lower tax bracket, it may make more sense to open a Roth 401k where you pay the taxes now. This plan also offers some qualified tax-free withdrawals. Just be sure to select a beneficiary or the person who gets your money if you die when you set up your 401k.

More often than not, your company is paying for a portion of the fees associated with your account. And in many cases you aren’t able to negotiate them. However, with all investments, it’s important to understand the fees you’re being charged. You want to keep that below 1 % for maximum savings power. Any higher and fees will be eating away at your returns over a long period of time.

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How Much Can I Invest?

For 2017, the maximum amount of compensation that an employee can defer to a 401k plan is $18,000. Employees aged 50 by the end of the year and older can also make additional catch-up contributions of up to $6,000 for a total of $24,000. The maximum allowable employer/employee joint contribution limit remains at $53,000 for 2016 and $54,000 for 2017 (or $59,000 for those aged 50 and older). The employer component includes matching contributions, nonelective contributions and/or profit-sharing contributions.

Additional 401k Resources

If you’re curious about which options to choose or just need additional info, check out these sweet resources:

Guest Post – Ready To Invest: Ready To Invest: My first guest post and a great intro to investing.

So you’re ready to invest. What next?: A great M$D post about the first step to take before investing.

This 401k calculator can help you figure out how much you should be saving.

The 401k fee analyzer can show you how the investment fees in your plan stack up to others.

The NerdWallet IRA vs. 401k guide can help you maximize your retirement savings dollars in both types of accounts at once.

Make it Easy to Save

Make your 401k contributions automatically. You can even set up your plan to raise your level of saving each year. The more automated your financial plan is – the more likely you are to have a substantial nest egg when you get ready to retire!

What’s your experience with 401K plans and other investment vehicles?

-Bob @ The Money Nerve

Comments 20

    1. Post

      Absolutely! I hope that the increase in information and technology will change that, at least for millennials. I believe! Thanks for stopping by Chris!

  1. Nice! One other thing that I wish I had understood when I started my first job was vesting. Although my company matched 6%, it only vested at a rate of 25% a year. Even though I was maxing out my 401k contributions (and getting the most from my employer), I had to give 75% of it back when I left. I was only a month away from hitting two years.
    My current employer only gives me 1.5%, but it is fully vested immediately. It’s pennies on the dollar, but it’s still free money. Great explainer post!

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  2. Great beginners guide! One thing to note on the “what type” section…most of the time, from what I’ve seen, even if you can sign up for a Roth 401(k), any employer contributions will be in a traditional, pre-tax 401(k).

    Not that big of a deal, but an important distinction when it comes time for tax planning, particularly if the financial institution your 401(k) is parked at doesn’t split them out very well. Also important if you plan on rolling them into IRA’s when you change jobs!

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      Great point! Thanks for providing that info! The tax impact of investing is something I’m interested in learning more about and publishing some articles of.

  3. Agreed! Company matching on 401K’s is a no-brainer because it’s free money. And who says no to free money for goodness sake! We’re big on 401K’s in our family. We go the traditional route due to our incomes. We max out his and her’s, and also our his and her IRA’s. Which is close to $50K in savings per year, tax-advantaged, and our taxable incomes are lowered by that amount as well, so we’re double-dipping!

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      Sweet! Impressive work maxing out retirement accounts! You’re right, it’s a no-brainer in my opinion as well!

  4. MSD –

    Nice short/sweet article. DEFINITELY do up to the match! In my boat – since you never know about future tax laws/changes – I say pre-tax and max it out if one can! The $ savings now, is incredible, and there are ways to roll/convert later on, as well, to reduce your impact and to make it even more worth while.


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      Absolutely! We are totally on the same page here. The tax benefits today are phenomenal and you can figure out conversion later in the future.

  5. I just wish I had employer matching in my 401k! I had no idea until a few months ago you could exceed 18k with the employer match! Bah!!

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      Oh no!!! Yeah, you as an individual can contribute $18K, but the employer match goes on top of that.

  6. This is such a great beginner’s guide! I was actually thinking about writing a post about why not contributing up to the employer % match is essentially giving up free money. And I’m definitely on team pre-tax when it comes to 401ks!

    One thing my husband and I do is when we feel like our budget is “comfortable” we’ll up our 401k contribution percentages by 1%. It’s a little bit of money that doesn’t make it into our savings accounts, but [hopefully] it’ll lead to great benefits in the long run!

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      Definitely a great idea! Any time you can take a little cash that you’d otherwise not notice and put it in investments, you totally should!

  7. I’m Canadian and we have something similar which is called a Registered Retirement Savings Plan. I can not stress how important is to understand these accounts and to know what your employer is willing to offer as far as matching or pensions are concerned. Way too many of my peers don’t see this account or company matching as a positive. It makes no sense!

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      Thanks for putting this into perspective for Canadians! And I couldn’t agree more, understanding your investment options, especially for the tax advantaged ones is so important!

  8. Great guide for beginners. I must admit I’m still astonished when I talk to some of my coworkers which do not take part of our retirement benefits package and specifically the company match, basically leaving free money on the table. There’s clearly a lack of education when it comes to personal finance!

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  9. Great post. I’d like to note that these plans sometimes have different names in the public sector. For example, the equivalent for federal employees is the Thrift Savings Plan (TSP). With the TSP, you can choose where the money is invested, from about 5 alternatives (including bonds only or mostly stocks). In any case, I agree that it’s super important to invest in these, especially because of the employer match!

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