Unveiling Your 401(K) Investments: A Guide To Understanding Your Retirement Plan

When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. Most employers now offer a Roth 401(k), also known as a designated Roth account. Contributions to Roth accounts are made with after-tax dollars, which means you don't get a tax deduction. Instead, your money can potentially grow tax-free and be withdrawn in retirement without any taxes.

Pre-tax contributions

Contributions to a traditional 401(k) are made with pre-tax dollars, meaning the money goes into your retirement account before it gets taxed. With pre-tax contributions, every dollar you save will reduce your current taxable income by an equal amount, which means you’ll owe less in income taxes for the year. You won’t owe any taxes on these funds until you withdraw money from your account, typically after you retire.

For example, the $1,200 you contribute to a traditional 401(k) in a given year will reduce the gross income you must report to the IRS for that year from $40,000 to $38,800.

Most employers now offer a Roth 401(k), also known as a designated Roth account. Contributions to Roth accounts are made with after-tax dollars, which means you don't get a tax deduction. Instead, your money can potentially grow tax-free and be withdrawn in retirement without any taxes.

To avoid penalties and/or taxes on withdrawals, you must hold the account for at least five years and be older than 59 1/2 (age 55 if you separate from your current employer).

Each 401(k) plan tends to offer different investment options, including mutual funds, exchange-traded funds (ETFs), target-date funds, index funds, money market funds, and individual stocks and bonds.

After-tax contributions

Contributions to Roth accounts are made with after-tax dollars, which means you don't get a tax deduction. Instead, your money can potentially grow tax-free and be withdrawn in retirement without any taxes.

To avoid penalties and/or taxes on withdrawals, you must hold the account for at least five years and be older than 59 1/2 (age 55 if you separate from your current employer). Generally, you can choose from a range of investments to fit your risk tolerance and time to retirement. Each 401(k) plan tends to offer different investment options, including mutual funds, exchange-traded funds (ETFs), target-date funds, index funds, money market funds, and individual stocks and bonds.

Employee contributions are immediately vested and considered yours. However, most companies, matching or other employer contributions aren't considered yours until you've remained with the company for a set period of time. So, if the company has a vesting schedule, you might not be able to keep all the money your employer invests on your behalf until after you've stayed at the company for the required time period.

Contributions to a traditional 401(k) are made with pre-tax dollars—meaning the money goes into your retirement account before it gets taxed. With pre-tax contributions, every dollar you save will reduce your current taxable income by an equal amount, which means you’ll owe less in income taxes for the year. You won’t owe any taxes on these funds until you withdraw money from your account, typically after you retire.

Your maximum contribution to a 401(k) depends on the annual limits set by the IRS. The IRS looks at inflation to determine the annual contribution limits.

Investment options

When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. Employee contributions are immediately vested and considered yours. However, most companies, matching or other employer contributions aren't considered yours until you've remained with the company for a set period of time.

Contributions to a traditional 401(k) are made with pre-tax dollars—meaning the money goes into your retirement account before it gets taxed. With pre-tax contributions, every dollar you save will reduce your current taxable income by an equal amount, which means you’ll owe less in income taxes for the year. You won’t owe any taxes on these funds until you withdraw money from your account, typically after you retire.

Most employers now offer a Roth 401(k), also known as a designated Roth account. Contributions to Roth accounts are made with after-tax dollars, which means you don't get a tax deduction. Instead, your money can potentially grow tax-free and be withdrawn in retirement without any taxes.

To avoid penalties and/or taxes on withdrawals, you must hold the account for at least five years and be older than 59 1/2 (age 55 if you separate from your current employer). Generally, you can choose from a range of investments to fit your risk tolerance and time to retirement. Each 401(k) plan tends to offer different investment options, including mutual funds, exchange-traded funds (ETFs), target-date funds, index funds, money market funds, and individual stocks and bonds.

A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals. The safe harbor 401(k) plan is not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans. Safe harbor 401(k) plans that do not provide any additional contributions in a year are exempted from the top-heavy rules of section 416 of the Internal Revenue Code.

Employer contributions

When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. Employee contributions are immediately vested and considered yours. However, most companies, matching or other employer contributions aren't considered yours until you've remained with the company for a set period of time. So, if the company has a vesting schedule, you might not be able to keep all the money your employer invests on your behalf until after you've stayed at the company for the required time period.

Contributions to a traditional 401(k) are made with pre-tax dollars—meaning the money goes into your retirement account before it gets taxed. With pre-tax contributions, every dollar you save will reduce your current taxable income by an equal amount, which means you’ll owe less in income taxes for the year. You won’t owe any taxes on these funds until you withdraw money from your account, typically after you retire.

Most employers now offer a Roth 401(k), also known as a designated Roth account. Contributions to Roth accounts are made with after-tax dollars, which means you don't get a tax deduction. Instead, your money can potentially grow tax-free and be withdrawn in retirement without any taxes.

A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals.

Your maximum contribution to a 401(k) depends on the annual limits set by the IRS. The IRS looks at inflation to determine the annual contribution limits.

Vesting requirements

Employee contributions are immediately vested and considered yours. However, most companies, matching or other employer contributions aren't considered yours until you've remained with the company for a set period of time. So, if the company has a vesting schedule, you might not be able to keep all the money your employer invests on your behalf until after you've stayed at the company for the required time period.

Check with your plan administrator for the vesting requirements in your particular 401(k) plan. Your maximum contribution to a 401(k) depends on the annual limits set by the IRS. The IRS looks at inflation to determine the annual contribution limits.

A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals.

When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. Each 401(k) plan tends to offer different investment options, including mutual funds, exchange-traded funds (ETFs), target-date funds, index funds, money market funds, and individual stocks and bonds.

Contributions to a traditional 401(k) are made with pre-tax dollars—meaning the money goes into your retirement account before it gets taxed. With pre-tax contributions, every dollar you save will reduce your current taxable income by an equal amount, which means you’ll owe less in income taxes for the year. You won’t owe any taxes on these funds until you withdraw money from your account, typically after you retire.

Frequently asked questions