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What Is a 401(k)?

Learn about 401(k) plans in this Howcast finance video with expert Gregory McGraime.


A 401(k) is a type of retirement account that you might have through your employer, and usually it allows you to save money directly out of your paycheck and to get some tax benefits as well. So this is great. This should be the foundation for a lot of people as it relates to their future retirement planning. So how does it work? Most people have access to a pre-tax 401(k), and what that means is the money comes off of your paycheck before taxes. So you're saving on taxes today, the money goes into the 401(k) and then it's invested for your future. The only time you're going to pay tax on a 401(k) is when you actually take money out in retirement, which for most people is when they're at a lower tax bracket because they have a reduced income in retirement. Some of you might also have access to a Roth 401(k) and that works very similar, but instead of getting the tax benefit today for putting money in, you get the tax money later, the tax benefit later and all the money's going to come out tax free. Now two big mistakes that people make with their 401(k), the first is not saving enough money. Everybody should do everything they can to save a minimum of 10% of their pay each year into their 401(k). The other big mistake people make is not investing the money that's in their 401(k) in a right, in a way that's right for their age, their time horizon and their personal tolerance for risk. So make sure you're doing those two things with your 401(k). You're saving enough money and you're investing that money in a way that's appropriate for your situation.

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