401(k)s Explained

Faith and Finances

401(k)s are not perfect, but they do provide a way for workers to begin their investing journey toward retirement. They can be complex and many books have been written about 401(k)s. In today's episode, we are going to simplify it for you.

In This Episode, We Look At:

What, exactly, is a 401(k)?

It is an employer-sponsored retirement plan and by "employer-sponsored" we do not mean that it is completely funded by the employer. This is a program through you can contribute a set portion of your earned income into investments, automatically, which means you do not have to rely on your memory to contribute.

In traditional 401(k) plans, your financial contributions come out of your paycheck without being taxed, so every dollar contributed is credited to your investment account.

These "pre-tax" contributions actual allow for more of your money to be invested without hurting your budget. For example, when you earn $100 you do not take home $100. Because of taxes, you take home something closer to $70 to $75. So if in your budget you can afford to part with $75 to invest for your future, you can have $100 going to work for you. From your paycheck, $100 is contributed, before taxes, which would have been $75 (take-home).

Now, if the employer offers a matching contribution of 50%, you would have $150 invested for the "cost" of $75. (Your $100 plus their $50), that's a pretty good deal.

Resources and Links:

Against The Grain -by Tim Rosen. Chapter Two provides additional wisdom and guidance in managing your 401(k).

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