What is a 401K?
A 401K is basically a retirement plan where people contribute part of their pre-taxable income into an account that is usually set up by an employer. This type of retirement plan is often one of the perks to working at a large corporation or business because the business will often match a percentage of the funds an employee puts in. It allows you to save towards retirement without having to worry about taxes and it also lowers your take home amount each week so that you are taxed on less money. And everyone likes to save money on their taxes. But with this form of retirement there are some very strict guidelines about how much can be put in at one time and when you can withdraw the money. You also have to worry about changing jobs or losing your job and your retirement fund.
If my employer goes bankrupt, is my 401K protected?
Unfortunately it does not mean that your 401K is protected. Take the Enron scandal as a great example. The company bigwigs did not take out insurance on their employee’s retirement plans. And as a result many people lost their life savings. The most important thing you can do prior to enrolling in a 401K offered by your company is to ensure that they have insurance that covers your money. You do not want them to close the doors and take your money with them.
What happens to my 401K if I leave my job for another?
Luckily you do have some options if you leave one company and go to another. You can always roll your 401K savings into the new company’s retirement plan or you can convert it to an IRA. You can also withdraw the money but that should be a last resort option because you will be taxed very heavily. How heavily will you be taxed? You will be hit with about 55% in taxes and fees because you cashed out early before retirement. The ideal situation is that you convert your money over into another retirement fund and do not lose any nor are you heavily taxed as a penalty.
Can I withdraw my 401K money anytime I wish?
Yes, you can withdraw your 401K money anytime you wish but it is very, very unwise to do so. Unless you are faced with extreme circumstances that require immediate cash, you should never do so before you hit the minimum retirement age. The tax penalties on it are extraordinary and will reduce your available amount by over half! There are other options such as taking out a loan against your retirement savings. And even though you will still be paying interest and taxes on that loan it is not nearly as much as if you cashed in your retirement.
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