Question 1

How much should I contribute to my 401(k)?

Accepted Answer

At minimum, contribute enough to get your full employer match, as this is free money. Financial advisors generally recommend saving 10-15% of your gross income for retirement, including the employer match. If you start saving later in life, you may need to contribute a higher percentage to catch up. Increase your contribution by 1% each year until you reach your target.

Question 2

What is an employer match and how does it work?

Accepted Answer

An employer match is when your company contributes money to your 401(k) based on your own contributions. A common formula is 50% match on the first 6% of salary contributed. If you earn $75,000 and contribute 6% ($4,500), your employer adds 50% of that ($2,250). If you contribute less than 6%, you do not receive the full match. Some employers offer dollar-for-dollar matches or different percentages.

Question 3

Should I choose Traditional or Roth 401(k)?

Accepted Answer

Traditional 401(k) contributions reduce your current tax bill and grow tax-deferred, but withdrawals in retirement are taxed as income. Roth 401(k) contributions are made after-tax, but qualified withdrawals in retirement are completely tax-free. If you expect to be in a higher tax bracket in retirement, Roth is often better. If you expect a lower bracket, Traditional may save more. Many people split contributions between both for tax diversification.

Question 4

When can I withdraw from my 401(k) without penalty?

Accepted Answer

You can make penalty-free withdrawals from a traditional 401(k) starting at age 59 and a half. Withdrawals before that age are generally subject to a 10% early withdrawal penalty in addition to regular income taxes. Exceptions include disability, certain medical expenses, and the Rule of 55 (if you leave your employer at age 55 or later). Required minimum distributions (RMDs) begin at age 73.

Question 5

What happens to my 401(k) if I change jobs?

Accepted Answer

When you leave an employer, you have several options for your 401(k): leave it with the former employer (if allowed), roll it over to your new employer's 401(k), roll it into an IRA, or cash it out (not recommended due to taxes and penalties). Rolling into an IRA often provides the most investment options. Make sure to do a direct rollover to avoid the mandatory 20% tax withholding on indirect rollovers.

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