A 401(k) retirement account is a savings plan that is set up via an employer in the United States. Typically, a 401(k) is funded through contributions directly from an employee’s paycheck, which are then matched by the employer up to a certain percentage. This type of retirement account and matching employer contributions are often offered as employment perks by companies to their employees.

Talk to Your Employer

When you start work at a new company, that is typically when you would set up a 401(k) account with that company. The employer handles most of the process of getting the account set up, although the employee would have some paperwork to fill out as well as some decisions to make about how much to contribute to the account. The account is usually hosted with a financial institution that the employer has a relationship with so that all employee 401(k) accounts are in one place.

If you own your own business, you can set up a 401(k) account for yourself. As your own employer, you would need to decide what kind of account you wanted to have and then contact a financial institution directly in order to find out how to open an account with them.

Types of 401(k)

There are two types of 401(k) retirement account: traditional and Roth. The difference between the two is determined by when taxes are applied to the funds in the account. In a traditional 401(k), the funds are taxes when they are withdrawn from the account after retirement. In a Roth 401(k), the funds are taxed before they are deposited into the account, meaning that they are not taxes upon withdrawal. Which type of 401(k) account you can get may depend on what the employer offers. If your employer offers both types of 401(k) account, then you’ll have to decide which type is best for you.

Contributions

Once you have the account set up, you have to decide how much of your paycheck you want to contribute every pay period. It’s recommended that you contribute the maximum amount that your employer will match. Matching contributions from your employer is essentially free money for retirement, so if you are able to put at least that amount in, it’s recommended that you do so. The more money you put into your retirement account earlier on, the more it can grow, so it’s recommended that you put in as much as you can afford to, up to the contribution limit.

Managing the Investments

A 401(k) retirement account is an investment account. The money doesn’t just sit in the account, slowly accumulating interest like a savings account would. Instead, the money in the account is invested into stocks, bonds, and other types of investments. Investment management is an important part of ensuring that a 401(k) grows to reach its full potential. Asking a financial advisor for assistance with investment management is a good idea to help you decide what investments are best for you.