My Company Offers A Standard 401(K)-What Does That Mean?

PUBLISHED Oct 18, 2022, 11:44:15 AM        SHARE

imgThe Free Financial Advisor Blog

When you’re starting with a new employer, you typically get access to a range of benefits. When it comes to retirement plans, many companies offer employees a standard 401k. If you haven’t had a 401k before, you may be wondering what a typical one involves. Here’s a look at the standard 401k, including what it is, how it works, and the benefits it can provide.

What Is the Standard 401K?

Technically, there isn’t a “standard” 401k, as every company’s plan can differ to a degree. However, the most common offering is a traditional 401k.

A traditional 401k is an employer-sponsored retirement plan that provides employees with a selection of investment options. That can include stocks, ETFs, mutual funds, or similar types of assets, though the exact ones available do vary between retirement plans.

Employee contributions are taken directly from their paychecks, making it easy to save for retirement. Additionally, they are pre-tax. You don’t owe income taxes on the amount you send to the retirement plan immediately. Instead, you’ll pay taxes on withdrawals.

How the Standard 401K Works

A standard 401k allows employees to set money aside in a retirement-specific investment account. In many ways, it functions similarly to investing outside of a retirement account. Often, you can select from a variety of stocks, bonds, ETFs, or mutual funds. Additionally, you can usually adjust your allocations over time, though there may be limits on the types of changes you can make.

Once a contribution is made, the requested assets are acquired. Then, those investments will grow or shift over time. While most increase in value over the long-term, economic conditions that cause stock market downturns will impact 401k portfolio values. As a result, the total value of the retirement account will fluctuate, though they generally trend upward.

Once you reach retirement age, you can make withdrawals without incurring any financial penalties. However, those withdrawals do trigger tax obligations, as that money is treated as income by the IRS.

Early withdrawals are potentially an option, but they can trigger a financial penalty depending on how the funds are used. Plus, taking money out early means missing out on future gains, so it’s best to wait until your retirement whenever possible.

The Benefits of the Standard 401K

Aside from being a simple way to set money aside for retirement, a traditional 401k comes with many other benefits. As mentioned previously, contributions can come directly from your paycheck, making it easier to set money aside. Additionally, the contributions are pre-tax, so they can reduce your current tax burden.

In many cases, employers also offer contribution matches with their 401k plans. With these, the company contributes up to a certain percentage of your income, based on the amount you’re contributing. In many ways, this is functionally free money that boosts the value of your portfolio. However, as with your contributions, you do have to pay taxes when you withdraw the funds during your retirement.

If you leave your employer, you may also have options about what happens to your 401k. Some companies may allow it to remain where it is, though that isn’t universally the case. Plus, you can often roll the account over when you exit, transitioning the funds to another retirement account instead. In some cases, that means you can convert a 401k into an IRA if you prefer.

Can You Opt-Out of a Company 401K?

In most cases, opting out of an employer-sponsored 401k isn’t ideal, particularly if the company offers matching contributions. However, if you prefer to invest for retirement on your own or need to pause your contributions due to a financial hardship, that’s usually an option.

Speak with your employer’s human resources department to explore the paths you can potentially take. They’ll be able to let you know whether pausing contributions or opting out entirely is possible and can help you assess the impact of that decision. That ensures you can make a sound choice before moving forward, allowing you to ensure you don’t experience any unexpected consequences.

Do you have one of the standard 401K options through an employer and want to tell others about your experience so far? Do you wish you had access to another kind of retirement plan, or is the 401K working for you? Share your thoughts in the comments below.

Read More:

Originally Posted in The Free Financial Advisor

Sound investments
don't happen alone

Find your crew, build teams, compete in VS MODE, and identify investment trends in our evergrowing investment ecosystem. You aren't on an island anymore, and our community is here to help you make informed decisions in a complex world.

More Reads
The Best Water Utilities that Pay Dividends

Water Utility stocks are great sources of dividends and can add more stability to an income portfolio

Intel (INTC) Stock – Too Cheap to Ignore?! | Dividend Investing

Intel (INTC) stock is down 45% this year. The dividend yield has SWELLED up to 5%. As a dividend investor, looking for iconic dividend stocks, Intel stock may have too low of a stock price to ignore.

Dividend Kings In Focus: Lowe’s Companies

Lowe’s traces its roots back to 1921, when LS Lowe founded a hardware store in North Wilkesboro, North Carolina.

Invest in Water Stocks

Water stocks are a unique class of utility equities. Water and wastewater treatment and service is often a municipal function.

The 6 Best Infrastructure ETFs to Buy Now

Infrastructure is necessary to make the world go round in our day and age. Both developed and emerging markets make use of energy and transportation to connect their people.

Alexandria Real Estate (ARE): Undervalued REIT

Alexandria Real Estate (ARE): Undervalued REIT. The overall Real Estate Investment Trust (REIT) sector has been down a lot year to date. For example, the office REIT category has been down 21.9% since the start of 2022. In addition, the REIT Industrial category is down 18% year to date. This decline provides long-term investors with some opportunities in the Real Estate sector.

Up in smoke

Who's ready to get baked

Why Don’t Investors Just Invest in the S&P 500?

The S&P 500 has a long streak of positive returns. So why doesn’t everyone just invest in the S&P 500?

GME Stock Forecast | Price | Quote | News

GameStop Corp. (NYSE: GME), is involved in the business of consumer electronics, video games, and gaming merchandise retailers.

Sonnet Biotherapeutics Holding Inc. | Sonn Stock Analysis

A company called Sonnet Biotherapeutics has been developing a drug that treats inflammatory bowel disease known as Crohn's.

NRG Energy Stock Forecast

NRG stock forecast regarding Return on Equity (ROE) is very bright and optimistic due to its solid income statement, robust balance sheet and rosy ESG outlook. But this stock has its own risks as well.

Recent Stock Purchase September 2022

As you know by now I make a stock purchase every single month no matter what is going on in the world and despite the doom and gloom headlines. Perhaps I am naive or more of an optimist that we will get through these dark financial times somehow.

Will Nike Stock Recover?

Nike is an American multinational corporation that design, develops, manufactures and markets footwear, apparel, equipment and services worldwide.

5 Income Stocks for Retirees

When most people reach the age of 50, they start thinking about retirement. At this age, you need a strategy in place about housing, working, and income before retiring.

Mondelez International: Buy The Snack Giant

Slow and steady wins the race. It holds true for investing in equities because of reversion to the mean. For instance, the latest group of new tech stocks were trading at bubble valuations and plummeted when the Federal Reserve started tightening.

Monthly Dividend Stock In Focus: Pembina Pipeline

Midstream energy companies are widely-known to be a source of high dividend yields. Midstream operators benefit from favorable economics because of the continued need for oil. In addition, midstream companies are less exposed to commodity price risk than their upstream peers in the exploration and production industry.

Will it break through

At&t feels good to me this week

10 Solid Picks For A Rocky Market - Zen Investor

I searched for companies that are inexpensive relative to their fair value (margin of safety) and have above-average price and earnings growth prospects.

September 2022 Stock Considerations

With the start of a new trading month, it is time, once again, for me to highlight some of my potential stock buys for September. With all the recent market volatility there is no shortage of stocks that are looking seemingly cheaper when compared to the closing months of 2021.

Monthly Dividend Stock In Focus: Prospect Capital

Business Development Companies — or BDCs, for short — allow investors to generate income with the potential for robust total returns while minimizing the amount of tax that is paid at the corporate level.

Resources for Publishers
Resources for New Investors
Boosted with BossCoin
Financial Literacy Leaders
Tom Hamilton
Wise Intelligent
Mark Robertson
Kevin Matthews II
Akeiva Ellis
Brendan Dale
Kenneth Chavis IV
Sharita Humphrey