Unraveling The 401(K) Conundrum: To Invest Or Not?

A 401(k) plan is a workplace retirement plan that allows you to make annual contributions up to a specific limit and invest that money for your later years. When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. These typically include an assortment of target-date funds and mutual funds.

401(k) plan contribution options

A 401(k) plan is a workplace retirement plan that allows you to make annual contributions up to a specific limit and invest that money for your later years after your working days are over. When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. These typically include an assortment of target-date funds and mutual funds. Target-date funds are the way “you’re least likely to make mistakes,” Lazaroff said. These accounts contain a mix of stocks, bonds, and other securities that are adjusted as your chosen date approaches, generally shifting toward more conservative investments as you near retirement.

There are a lot of ways to invest money — high-yield savings accounts, CDs, bonds, funds and stocks are all options. The best investment for you depends on investment goal, timeline and other factors. When you withdraw from your account in retirement, your contributions and investment earnings are generally fully taxable. The taxes will be determined by the tax rate at the time of your withdrawal. With a Roth 401(k), you make contributions with after-tax dollars. This means that once you retire at age 59 ½ or later and begin taking distributions from your account, you won’t have to pay taxes on any of your contributions or earnings (not including any employer match, which will get taxed when you collect any of it).

Whether you choose between investing in a traditional or Roth 401(k) depends on your preference and what your employer offers. If your company offers 401(k) plans to its employees, you may be able to invest in both or only one. Contact your plan administrator for more information. If you are employed by a public school, state college, religious organization, non-profit or another tax-exempt organization, you may be allowed to participate in a 403(b) plan.

Tax implications of withdrawal

K) plans are workplace retirement plans that allow you to make annual contributions up to a specific limit and invest that money for your later years. When you withdraw from your account in retirement, your contributions and investment earnings are generally fully taxable. The taxes will be determined by the tax rate at the time of your withdrawal.

There are two types of 401(k) plans: traditional and Roth. With a traditional 401(k), you make contributions with pre-tax dollars. This means that once you retire at age 59 ½ or later and begin taking distributions from your account, you will have to pay taxes on any of your contributions or earnings (not including any employer match, which will get taxed when you collect any of it).

With a Roth 401(k), you make contributions with after-tax dollars. This means that once you retire at age 59 ½ or later and begin taking distributions from your account, you won’t have to pay taxes on any of your contributions or earnings (not including any employer match, which will get taxed when you collect any of it).

It's important to note that withdrawing from your 401(k) account before age 59 ½ will result in penalties and taxes. The IRS imposes a 10% penalty on early withdrawals, and you will also have to pay income tax on the distribution.

In summary, the tax implications of withdrawing from your 401(k) account depend on the type of plan you have. Traditional 401(k) plans are subject to income tax on withdrawals, while Roth 401(k) plans offer tax-free withdrawals after age 59 ½. Early withdrawals from either plan will result in penalties and taxes.

Employer match benefits

When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. These typically include an assortment of target-date funds and mutual funds. Target-date funds are the way “you’re least likely to make mistakes”, Lazaroff said. These accounts contain a mix of stocks, bonds, and other securities that are adjusted as your chosen date approaches, generally shifting toward more conservative investments as you near retirement.

When you withdraw from your account in retirement, your contributions and investment earnings are generally fully taxable. The taxes will be determined by the tax rate at the time of your withdrawal. With a Roth 401(k), you make contributions with after-tax dollars. This means that once you retire at age 59 ½ or later and begin taking distributions from your account, you won’t have to pay taxes on any of your contributions or earnings (not including any employer match, which will get taxed when you collect any of it).

If your company offers 401(k) plans to its employees, you may be able to invest in both or only one. Contact your plan administrator for more information. If you are employed by a public school, state college, religious organization, non-profit or another tax-exempt organization, you may be allowed to participate in a 403(b) plan.

Though the value of your 401(k) will dip as the market dips, it's likely that it won’t forever—or even for too long. A 401(k) plan is a workplace retirement plan that allows you to make annual contributions up to a specific limit and invest that money for your later years after your working days are over.

Meeting the match doesn’t necessarily mean you have to sacrifice other financial goals, such as paying down debt or establishing an emergency fund, he says. “You can still chip away at debt and put away small amounts in an emergency fund if necessary. But securing that employer match is crucial.”

Investment strategies for retirement

A 401(k) plan is a workplace retirement plan that allows you to make annual contributions up to a specific limit and invest that money for your later years after your working days are over. When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. These typically include an assortment of target-date funds and mutual funds. Target-date funds are the way “you’re least likely to make mistakes”. These accounts contain a mix of stocks, bonds, and other securities that are adjusted as your chosen date approaches, generally shifting toward more conservative investments as you near retirement.

There are a lot of ways to invest money — high-yield savings accounts, CDs, bonds, funds and stocks are all options. The best investment for you depends on investment goal, timeline and other factors. Though the value of your 401(k) will dip as the market dips, it's likely that it won’t forever—or even for too long.

When you withdraw from your account in retirement, your contributions and investment earnings are generally fully taxable. The taxes will be determined by the tax rate at the time of your withdrawal. With a Roth 401(k), you make contributions with after-tax dollars. This means that once you retire at age 59 ½ or later and begin taking distributions from your account, you won’t have to pay taxes on any of your contributions or earnings (not including any employer match, which will get taxed when you collect any of it).

Whether you choose between investing in a traditional or Roth 401(k) depends on your preference and what your employer offers. Meeting the match doesn’t necessarily mean you have to sacrifice other financial goals, such as paying down debt or establishing an emergency fund. You can still chip away at debt and put away small amounts in an emergency fund if necessary. But securing that employer match is crucial.

401(k) vs. 403(b) plan comparison

A 401(k) plan is a workplace retirement plan that allows you to make annual contributions up to a specific limit and invest that money for your later years after your working days are over. When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. These typically include an assortment of target-date funds and mutual funds.

A 403(b) plan is a retirement plan for employees of public schools, state colleges, religious organizations, non-profits, and other tax-exempt organizations.

When you withdraw from your 401(k) account in retirement, your contributions and investment earnings are generally fully taxable. The taxes will be determined by the tax rate at the time of your withdrawal. With a Roth 401(k), you make contributions with after-tax dollars. This means that once you retire at age 59 ½ or later and begin taking distributions from your account, you won’t have to pay taxes on any of your contributions or earnings (not including any employer match, which will get taxed when you collect any of it).

Whether you choose between investing in a traditional or Roth 401(k) depends on your preference and what your employer offers.

Frequently asked questions