401k

[cows'n'fish]

Being stuck out in the back blocks of Australia Im not up on all the terms used in some of these job ads. Can someone (probably all of you) tell me what 401K means.:confused:

[Spaced]

I beleive its superanuation, but Im aussie as well.

[trimpot]

I thought it was unusual that, no matter what the job, you always got paid $401,000!:}:\ :}

[RDRickster]

I'm not an accountant, but "401K" defines a certain section in the IRS tax codes. This is (or could be) your retirement account. Employers will match (a portion) of what you contribute to this retirment account. Also, you can take this account with you from employer to employer (roll-over). There are many ways this can be set up, but just because an employer has a 401K doesn't mean it's a great thing.

Enron had a great plan, but it was paid on the company's own stock... totally worthless, now. Some 401K's are based or backed by weak mutual funds... large losses over the past few years. Same thing with stocks. If your employer is offering a 401K program, it is usually through an investment company (i.e. Fidelity, etc). Don't get into something that is high yield, because it will have high risk. Stay stable... contribute the maximum allowed by law... ensure your employer matches (contributes) the maximum, as well. Most importantly, make sure the 401K isn't based on company stock and make sure it is stable. If so, it CAN be a really great thing.

[cows'n'fish]

Thanks RDRickster its great to find someone who can answer that question. I also was wondering why my company does'nt pay me $401,000.00 p.a. like every other pilot in the world:) :)

[Gomer Pylot]

Technically, it's 401(k). From the section number in the tax codes. It's always a good thing, if the company matches, because it's free money, and all the contributions are tax-free, thus reducing your current taxes while putting money in your pocket. As RD said, check the available options. You're usually limited to a specific investment company, whose funds may or may not do well, and whose management fees can eat away at your funds. There's a huge range of possibilities.

[OFBSLF]

Traditional pension plans are defined benefit plans -- if you work there for X years, then when you retire you will get Y dollars per year.

In contrast, 401k plans are defined contribution plans. The employee contributes a particular amount of money. The company may or may not match a portion of that amount (it's up to the company). The matching funds may be vested immediately, or may vest over time. How much you will have on retirement is a function of how much you put in and how well you invest it. Given the performance of the US stock market over the last few years, I've taken to referring to my 401k as a 200.5 :{

There are limits to how much the employee can contribute. IIRC, you can contribute up to 15% of your salary, but no more than $12,000 per year (that amount changes each year).

The money that you put in your 401k account (and any money contributed by your employer) is not taxed. In other words, if your gross pay was $100,000 per year, but you put $10,000 of that in your 401k, then your state and federal income tax would be based on $90,000. Any dividends, income, and capital gains earned by your 401k account is not taxed -- in other words, it grows tax free. Your 401k account is taxed when you withdraw it, after retirement.

Your employer will choose a fund manager for the 401k, so you will be limited to a particular set of funds. Depending upon the employer, this may be a large or small set of funds. Usually you will have a selection of funds from a large mutual fund company, like Fidelity or Vanguard.

Most employers will let you borrow against your 401k account (although this is not a particularly good idea). You can withdraw funds from your 401k account prior to retiring, but you have to not only pay income tax on the withdrawal, you also have a 10% penalty to pay.

If you leave that employer, that 401k money is yours (except for any employer matches that are not vested). You can leave it in your previous employers 401k plan. Or you can roll it over into your new employer's 401k plan. Or you can roll it into an Individual Retirement Account (IRA) where it will still grow tax free until you retire. You have to follow the rules in rolling it over to another 401k or IRA, so that it will be a non-taxable event. But it's not hard to do -- all the fund companies will take care of it for you, just do what they tell you to do.

If you do come to the states and start working for an employer with a 401k, I strongly suggest that you max out your contribution. $10,000 contributed when you are 25 will be worth a whole lot more upon retirement than $10,000 contributed when you are 55 -- the wonders of compound interest at work.

[Gomer Pylot]

Unfortunately, I was over 50 when my employer started the 401(k) plan. :(

I just hope the stock market stays low, and even goes lower, for a few more years. I don't care what my plan is worth today, I care about what it will be worth when I retire. As long as I'm contributing to a 401(k), the market needs to be low, so my money buys more shares. If the market drops by half, stays there, and comes back to just where it was, then I have twice as much saved. This isn't revolutionary, it's just the old "Buy low, sell high" theory. For me, I want to buy shares as cheaply as I can, then about the time I retire, be able to redeem the shares for lots more. The odds of that are pretty low, but I can dream, can't I?

[OFBSLF]

Gomer:

That's what I keep telling myself. Of course, I could be trying to catch a falling knife...