What is a 401k?

• A 401k is an employer-sponsored retirement plan. Why is it called a 401k? Well, that's the section of the internal revenue code for the federal government that allows you to do it.

Now, what are the benefits? Well, as far as I know, there's two major ones. The biggest one is it allows you to save money for retirement before taxes. So, normally you get a paycheck, you have to pay some taxes on that money, and then you get the money, and then you might be able to invest it if you're able to save some of it.

But with the 401k, you get to put your pre-tax money in before taxes are taken out and put that into an investment account for retirement. Now, there's a little bit of a catch because you can invest it tax-free in a 401k account, but then when you take it out when you retire at an age older than 59 and a half, you will then have to pay taxes, so your taxes are deferred.

Now, that might work out because at that time, you're retired. That might be all of your income. You might have a lower tax rate then, or at minimum, you were able to at least defer the taxes and invest without having to pay them.

Now, the other benefit of a 401k is many employers will match or do a partial match of some of the money that you contribute. So some might say for every dollar you put in, we'll put 50 cents or for every dollar, we'll put a dollar, up to a certain amount.

So by putting money into a 401k, you're to some degree able to get free money from your employer. Now, there is a catch. If you were to take that money out before your 59 and a half or there are some other special cases, you're gonna have to pay a penalty of about or exactly 10% of what you take out.

So it isn't something that you want to do lightly, but in a lot of cases, because of the employer match, it still might be okay to do it because once again, you're getting that free money from the employer.