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Navigating The 401(k)

May 3, 2017 As soon as you graduate, it seems like everyone is constantly talking about the future. Especially when it comes to money. Where are you working? How much are you making? Have you started a savings plan yet? What about a 401(k)? The last question can be especially stressful. You just started working! You’ve barely even had the chance to make money, let alone put some of it aside. And what is a 401(k), anyway? We’re here to break it down for you. 
The name 401(k) comes from the tax code the IRS created to allow employers to set up a pretax retirement savings plan for their employees. It’s also the most common type of retirement plan, and the one you’ll read and hear about most often. The idea of a 401(k) is simple: You decide how much money you’d like to set aside from your paycheck each month, and your employer puts the money into the account you choose. Your paycheck will be smaller depending on the amount you choose to save, but not as small as you think since the 401(k) comes with plenty of tax benefits (which is great for you!).
Your 401(k) is funded by “pretax dollars,” which means the contributions you make to your plan are taken from your paycheck before taxes are taken out. This also means that if you decide to enroll in a 401(k) plan, you will pay less income tax on your overall take home salary. Who doesn’t like that?! Eventually, though, you will have to pay taxes on the money that you’ve contributed to your 401(k), but not until you retire. This gives you plenty of time to build the amount of money in your retirement fund, as well as for the money itself to accrue interest. There is one catch: If you choose to withdraw money before the age of 59 ½, you generally will be taxed 10% with an “early withdrawal penalty,” which can result in you losing quite a chunk of money depending on the amount of your contributions. That’s why savvy savers plan ahead!
There is also another type of 401(k) plan called the “Roth 401(k),” which is slightly different. Essentially, it works in the reverse function: Your contributions from your paychecks do get taxed, but when you eventually retire and withdraw the money, your withdrawals are tax free. The money in a Roth 401(k) also grows tax free as you contribute to it.
Another important part of a 401(k) program is the employer match. Many companies that offer a 401(k) enrollment plan also offer a match program, meaning they will match the contribution you make to your 401(k) (up to a certain set amount). For many companies, that’s as much as 6% of your total salary, which really adds up over time. And, it’s free money! You also do not pay taxes on your employer match amount until you withdraw from it after you retire. Employers often have “vesting” rules as well, which basically means you have to work at the company for a certain length of time in order to claim the full amount of the match your employer has contributed to the account. So, if an employer offers a match program which is fully vested after five years, that means you have to work there for five years before you can keep all of the match dollars they have provided. Many employers tier this system, so you can claim a greater proportion of your match dollars after each year or so. Rest assured, though, the dollars you contribute will always be yours. Phew!
Finally, if you choose to leave your employer or unexpectedly lose your job, you can usually rollover your 401(k) to what is offered at your new company – just be sure to look into this ahead of time. Although it can seem tempting to cash out your 401(k) when you leave a position, it will still be taxed if you are younger than 59 ½ years old. Depending on how you choose to have the funds given to you, you may have to pay additional fees as well. 
So there you have it, savvy savers. While there are plenty of ins and outs of a 401(k) retirement savings option, it’s an easy way for you to make a good investment that will benefit you down the road. You might also be interested in Side hustles are trendy, but can you make good money in the gig economy? Get tips to ensure that your side hustle business is actually worth the time & effort. Are you struggling to come up with the perfect New Year’s resolution? Here are three great reasons why focusing on your finances should be a priority this year! You reach the end of the month and once again your good intentions to save have been thwarted by unexpected expenses or—let’s be honest!—temptation. Guess what? You’re not alone. We’re guessing the no-savings club is one you’d rather not be a member of and we have five suggestions to put you on the right track to better savings. If your to-do list is growing at the same rate your holiday budget is shrinking, your kids have a bad case of the “gimmes” and you’re wishing you could be just sick enough to stay in bed endlessly re-watching A Christmas Prince, there’s still time to slow this holiday madness down. After months of hard work, our teams are starting to think about their future financial goals and how to make them happen. Check out their tips and tricks! The free money we’re talking about has to do with retirement contributions. Many employers will match a portion of the money their employees contribute to their employer-sponsored retirement account. So, you’ve got plans, but you’re not sure where to start? You’re not alone. Make your financial goals mean something with these tips from our very own President & CEO Kim Sponem. In a recent article in the Milwaukee Journal Sentinel, she said to be specific about your goals. We asked Kim to give examples of specific financial goals people can set. If you’re like some people, thinking about retirement is probably right up there with “schedule root canal” and “take dog to the vet.” You’re certainly not alone in feeling this way. But having lots of company doesn’t mean it’s ok to put retirement in your “I’ll worry about that someday” pile. Ever feel like your savings are stuck in the same spot? It has happened to all of us, even our CEO and president, Kim Sponem. Luckily, she has some advice to help get out of the pit and moving forward. Keep reading to learn how to take your savings to the next level. Featured Products Certificates Checking Accounts Home Equity Loans Home Loans Business Banking Certificates Checking Accounts Home Equity Loans Home Loans Business Banking Financial Education Upcoming Events Programs Tools & Calculators On-demand Webinars Podcasts Upcoming Events Programs Tools & Calculators On-demand Webinars Podcasts About Equity in Money™ About Summit Careers News Community Giving Equity in Money™ About Summit Careers News Community Giving Help & Support Contact Us Member Support Center Schedule an Appointment Find a Branch Contact Us Member Support Center Schedule an Appointment Find a Branch Please read the following before proceeding to: The website you are about to visit is solely the responsibility of the merchant or other party providing the site. The content of this third-party site, including materials and information, is solely the responsibility of the provider of the site. The Credit Union is not responsible for any such third-party content. Any transactions that you enter into with a vendor, merchant or other party that you access through this third-party site are solely between you and that vendor, merchant or other party. The Credit Union does not endorse the content contained in this third-party site, nor the organization publishing the site, and hereby disclaims any responsibility for such content. The Credit Union Privacy Policy does not apply to this third-party site, and for further information you should consult the privacy disclosures of the third-party site. NCUA Insurance Estimator Privacy, Security & Accessibility Rates, Fees, Terms & Disclosures Routing Number *  The Wisconsin's #1 Mortgage Lender designation is based on the number of loans in 2022, gathered from the Home Mortgage Disclosure Act data compiled annually by the Consumer Financial Protection Bureau. The results of the data were obtained through the LEI: 254900NTAC4H10MGSU23 **  SBA Lender of the Year Award for Credit Unions as awarded by the Small Business Administration of Wisconsin in 2023. Copyright 2024 © Summit Credit Union. All rights reserved. If you are using a screen reader and are having problems using this website, please call 608-243-5000 for assistance. Insured by NCUA