401k: The Ultimate Guide

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Retirement can be very confusing because when you start a new job they hand you a huge packet of all the info you are expected to know for your job. So between a hundred pages, there is a couple of them that deal with your retirement. But no one can legally tell you what to invest in unless you are paying them for that service. This is why you will hear some sort of disclaimer. Everyone’s situation is unique and there is no one size fits all approach to finance. Please do your own research and invest according to your risk tolerance. And while that is true it isn’t that helpful if you don’t know what a retirement plan is or what it is for. So today let’s demystify this as much as we can.

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These ideas are based on my personal experience and opinion and should not be considered professional financial investment advice. Furthermore, the ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

What is a 401k in simple terms?

A 401k in simple terms is one of many other programs that allow you to save money for retirement.

What is a 401k and how does it work?

A 401k is a specific type of retirement account (like a 403b, 457b, 401a, etc.) and has specific rules. A 401k is available for many people that work for a company, as opposed to a non-profit or government institution.

So a 401k is a retirement account that your employer needs to set up for you and let you participate in it. Some smaller companies don’t have these options, but all large companies do.

A 401k has contribution limits of $20,500 a year in 2022 and $22,500 in 2023. You can direct a portion of your income from your paycheck into this account that is run by a retirement broker. I have had accounts with Fidelity, Vanguard, Voya, and Charles Schwab. I am sure there are others, I just haven’t had them (yet). You don’t have a say in who your 401k is with as it is your company that chooses

When you direct your money into a 401k most of the time it comes out before you pay taxes on that money. When you withdraw that money you will pay taxes on it. If you withdraw pre-tax money early you will also pay a fine if you are under 59 1/2.

What is 401k and who benefits from it?

Who benefits from a 401k? Well, those that take advantage of it do. Not everyone has access to a retirement account and they are left with just investing in an IRA for $6000 a year in 2022 and $6500 a year in 2023.

Is 401k really a good idea?

Back In 1981, the IRS issued new rules that allowed employees to fund their 401k through payroll deductions, which created the 401k’s popularity. Within two years, nearly half of all big companies were offering 401k’s or were considering it, according to the Employee Benefits Research Institute. This was a great idea, except that most companies saw this as an opportunity to remove pension plans. By removing a pension plan companies were able to offload the responsibility for retirement and saving for retirement onto the worker. To be fair most workers are incapable of fully understanding what was given to them.

While that is better for those that like more control and have the knowledge to use it, overall I don’t think the 401k was a good idea given what happened to pensions. Although, not being tied to a company for 20 years to fully fund retirement in my mind is a good thing. So it is a mixed bag like any major decision in life.

Regardless, this is the system we have had since 1978 and even more so since 1981. So this is the system most people have (or one like it) to invest their own money for retirement because pensions are pretty much a thing of the past unless you are in government and some areas of finance. This leaves you with social security, which will be cut by 25% in the 2030s per the IRS, and any retirement accounts or other assets you have managed to accumulate. If you want to know more about what an asset is and the different types of assets you need to start to collect click here to read my article on the 7 sources of income you can earn.

Is 401k better than savings?

Yes, a 401k is better than savings. If you invest your money in almost anything you will get more interest on your money than you ever will in a savings account at your bank.

There are some interesting laws that banks follow. It used to be worse and how the banks were allowed to use your money led in large part to the 2008 real estate and stock market crash.

You see banks don’t have to keep all of your money. Instead, they have to keep a percentage of it. Then they can invest that money and use it to provide you the interest on your savings account.

No matter how high the bank’s savings account interest has been, you could have gotten better returns investing in stocks / bonds except for small periods in history.

Now, this doesn’t mean you shouldn’t have money in savings. You need to follow a set path for your money to work correctly. I have an e-book you can get for $10. It will show you the steps needed to accumulate wealth and pay off debt before you go all into a retirement account.

How are people eligible for a 401k?

You are eligible for a 401k or another retirement account if the place that employs you lets you invest in one. The company has to set up the accounts with a retirement broker and give you access. Unfortunately, many small businesses don’t set these up.

If you don’t have access to an employer-sponsored retirement account then you are left with investing in an IRA for $6000 a year in 2022 and $6500 a year in 2023. Which to be honest isn’t enough.

If you aren’t eligible for a 401k, 457 or another type of retirement account ask if your employer still has a pension plan. I have a family member that works for the state they live in and there is a state pension. Teachers, police, firefighters, and other government employees may still be eligible for a pension and may or may not have access to a 457 account.

How much should I put in my 401k?

How much should you put in your 401k? As much as you can afford and are legally allowed, whichever is less. Ideally, you will want to invest somewhere between 15% and 25% of your gross income or up to the maximum of $20,500 a year in 2022 or $22,500 in 2023.

If you invest your 401k properly this should be more than enough for most people to retire. Depending on how much you need to live on, you may be able to retire early. Just remember there are penalties for taking pre-tax funds from your 401k before 59 1/2 years of age.

If you put the money in post-tax (will cover this later) 401k (if eligible) then you can take out any of the principal but not the earnings from your 401k tax-free and without penalty. You will pay taxes and penalties on any earnings on withdraws before 59 1/2. Consult your tax agent and financial advisor about how to do this in a way that won’t cost you taxes and penalties if you need to. The rules for these can change over time so please consult with a tax and financial professional before withdrawing any money from your retirement accounts, no matter what your age.

What Happens To Your 401k When You Quit

Can I cash out my 401k if I quit my job?

Absolutely, but please don’t. If you don’t have the minimum balance requirement see if you can open up an IRA with Fidelity, or Vanguard and move the funds over that is the best idea. Now you will have to wait a period of time for the company to release your money to you.

How long do you have to move your 401k after leaving a job?

It depends. If you haven’t met the minimum balance requirement, which is normally $5,000 then you have 60 days to move the money into something else. It may be a week or two before you can start the transfer depending on how fast your human resources department is at processing your exit.

If you have more than $5000 in your account then you don’t have to move the money at all. It can stay in that 401k program as long as you would like it to be there. If you don’t want to move things around because like me I used to move jobs every 2 – 3 years and it wasn’t worth the hassle, you need a way to track your money.

If you want to track multiple accounts from your bank, retirement, credit cards, and home loans, to know your net worth at a glance, then I recommend Personal Capital as it has it all in one place. It is free to download and if you use this link and load up your retirement accounts into it then you and I will get $20 in Amazon Gift Cards.

What happens if you don’t roll over 401k within 60 days?

You can leave your 401(k) in your former employer’s plan if you meet the minimum balance requirement. Many employers require employees to have at least $5,000 in 401(k) savings if they decide to leave their money behind indefinitely.

If you have less than the minimum balance requirement then the money could be cashed out and returned to you. If you invested pre-tax then there will be taxes (at your highest income tax rate) and a 10% fee for not being 59 1/2 years old applied. This is why the amount you had is much higher than what you had before the 60 days are over. When I stupidly let this happen to me I lost about 35% of the money in there. It was closer to 45% but got some back when I did my taxes in March of the next year.

A 401k rollover is when you move the balance to a different account like into an IRA with Fidelity or Vanguard.

How long can a company hold your 401k after you leave?

For smaller balances, they will need a couple of days to two weeks (ish) to process your departure from the company. Then it can be transferred or rolled over into a different account.

For larger balances that aren’t impacted by the 60-day requirement to move or cash them out the process can take longer. I spent about 45 days once waiting for the ability to transfer my money to a different account.

Do you lose 401k match if you quit?

This depends on how your company sets up the 401k matching. Some companies will match up to a certain percentage that you put in and the funds can be available immediately or have a “vesting schedule.” This means that the company has decided to release the 401k match on a different timetable that they decide.

I have seen that all of your matching money for the previous year is released on a specific date, normally the date yearly bonus checks are cut. I have seen them do a vesting schedule of 33.3334% a year for 3 years that cuts yearly. I have seen a company wait 3 years on a month-to-month rolling schedule. So you will get your match from three years ago every month, assuming you stay three years.

How Can You Succeed Financially?

There is a clear path toward financial success and security.

It isn’t just being a worker for 45 years. Although for some it may involve that.

If you want to know what practical steps are needed to achieve financial freedom read my article on how to achieve financial freedom.

who is my 401k plan administrator

Your human resources department can tell you who your plan administrator is. Typically the plan administrator is your employer.

What is vested balance in 401k?

The vested balance is the amount that you and your company put in that is actually yours.

Any money you deposit is automatically vested by law and if you don’t see that happening call the department of labor and your Human Resources person immediately. But if the money used for a retirement match has rules for a vesting schedule then be sure to ask about that in the interview.

It is these little things that can make a great job on the surface, miserable in the long run. So when switching jobs ask about the 401k program. Ask about matching programs and the length of time for that money to be vested in your account. You want it to be immediately every month, by the way, not in 3 years. Do the same with medical insurance.

I took a job that paid less by $6,000 a year, but I made more money each month because of the matching 401k options and medical insurance costs. So the benefits outweighed (by about $12,000 a year) the loss of pay. I have had friends that jumped at more money a year and lost key benefits that cost them $300 a month even after the salary adjustment.

Why do I only get the vested balance?

You only get the vested amount because legally that is all you are entitled to. Remember that is all the money you have put in and any of the money they put in according to their vesting schedule rules. They should disclose this to you before hire, but you should ask in the interview as most companies will just say “Yes we have a matching program for retirement” and won’t go into details, especially on less than stellar retirement programs.

Can you withdraw vested balance 401k?

Yes, once the money is vested it is 100% yours to do what you would like.

What is the difference between a balance and a vested balance?

If your company has very long vesting schedules you will see a big difference in your total balance and your vested balance. Just remember if you are laid off, fired, or quit you are only getting the vested balance in your account unless you have a severance package that says otherwise. And if you are getting a severance package ask about it, the worst they will say is no.

How long until you are fully vested in 401k?

It really depends on the company and how it set it up. I have seen some that will vest a portion each year (33% each year for three years). I have seen other companies state that a portion of their 401k match will be vested after 3 – 6 years. It all depends on what the company sets up with your 401k broker.

What happens to 401k money that is not vested?

Nothing happens unless you leave the job. If you haven’t left your job then that money will eventually become vested and 100% yours. Just remember that vested means you now own it. Otherwise, unvested or not vested funds are a way a company uses to keep you from changing jobs because there is money that you will lose if you leave.

It is up to you to make the decision if that amount of money is worth staying with your current job. Sometimes you may have a better opportunity for growth at a different company that would make losing the money worth it. But it does keep you from just making a lateral move to a different company just for a change in scenery.

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How do I find my 401k from an old job?

The simplest and most direct way to check up on an old 401k plan is to contact the human resources department or the 401(k) administrator at the company where you used to work. Be prepared to state your dates of employment and Social Security number so that plan records can be checked.

What happens if I default on my 401k loan?

If you are unable to pay off the outstanding 401(k) loan within the required loan term, the unpaid loan amount will be treated as income for tax purposes. The outstanding amount will be taxed at your effective tax bracket rate, and an additional 10% penalty if you are below 59 ½.

Can I cash out my 401k?

Yes, you can, but you will pay fees on the money if you are under 59 1/2. Also if the money was taken out pre-tax you will owe taxes on all of that money in the year you take it out.

Even if you put the money into the 401k as a Roth post-tax you will owe taxes on any of the earnings above the principal you paid.

Can I cash out my 401k if I quit my job?

Yes, you can, but you will pay fees on the money if you are under 59 1/2. Also if the money was taken out pre-tax you will owe taxes on all of that money in the year you take it out.

Even if you put the money into the 401k as a Roth post-tax you will owe taxes on any of the earnings above the principal you paid.

Should I ever cash out my 401k?

I wouldn’t recommend ever cashing out your 401k unless you needed the money to prevent loss of shelter or health and wellbeing. You may find yourself in a place where you can’t find work and the only option you have is to start withdrawing your 401k. I hope that never happens to you, but I would leave the money alone unless you are in that sort of a dire situation.

How quickly does 401K grow?

This depends on numerous different factors. Are you invested in stocks that are growth stocks or dividend stocks? Growth stocks typically grow in value but don’t pay quarterly payments known as dividends to shareholders. Older, more established companies like AT&T and Microsoft won’t grow in value but they pay dividends to their shareholders. So in one respect, your 401k growth is a function of stocks appreciating in value (going from worth $10 to $15 for example) and in another respect, your 401k grows from your dividends being used to buy more stocks.

How quickly it grows depends on your risk tolerance. I will cover down below, but with greater risk, there is the possibility of greater growth – and loss. Investing in the S&P 500 has brought about an average of 10% year over year if you look at any 20-year period in the history of the stock market.

Investing in the stock market should be a long game. Let’s look at what would happen if you invested $3,000 in the S&P 500 in 1980 and then only reinvested the dividends and didn’t do anything else. Well, you would have over $300,000 in 2022, yes even with the drops in the stock market today. Since 1980 the S&P 500 has returned 11.38% on average each year. Now you may be thinking that doesn’t sound like a lot. But in 1980, $3,000 was worth over $10,000 in today’s money.

Does a 401K grow interest?

It absolutely can and should bring in interest on a regular basis. Now there will be periods when the stock market loses money. The market isn’t guaranteed to keep moving up and it never moves up consistently. But if you keep buying into the system and you are well diversified then yes the 401k will grow interest regularly.

You can then do the calculations yourself. If you want to assume an 11% return on your money you can go to a retirement calculator and put in the amount that you are saving today. Figure out how many more years you have left to save and put that in. Then put in how much you think you will save each month you can figure out roughly how much you could have in the future. Just know that there is no guarantee that the past will be repeated in the future,

Look at what the S&P 500 has done over time to see how this actually looks. Went from roughly $140 to over $3k and almost hit $5k.

Do millionaires have 401K?

If a millionaire is making an income then yes they are using a 401k and other retirement vehicles to store and invest their money. You will find out that millionaires store money in as many places as possible. If you want to know more about how the rich view money, check out my Master Your Money E-Book that will walk you through how the rich think about money and how you can get a handle on your finances like the rich do.

What should I invest in my 401k?

There are many things that one could invest in but I would research the S&P 500. Remember the S&P 500 is basically the top 500 US companies that are publicly traded.

In Vanguard, it is known as the Core Equity Fund or the Vanguard Institutional 500 Index Trust Fund.

In Fidelity, it is called the Fidelity 500 Index Fund (FIAIX).

Where Is Your Money?

Most people don’t know what they are invested in when they start a new job and open up a 401k.

Do you know exactly what the fund or funds you are investing in even are?

How much are you spending on fees?

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What is risk tolerance?

Risk tolerance is about how much you want to invest in higher-risk investments. If you can’t stand seeing your balance drop at all then you would be better to invest in bonds. But beware, being very risk-averse means you won’t have a lot of gains either.

Most people will do a mix of investments to put some of their money in something like bonds to safeguard their gains, but then more money in stocks to grow their money.

There are several different ways you can think about this. Warren Buffet used to recommend 10% bonds and 90% S&P 500 and now that the bond market has started to become more viable that isn’t a bad way to have a balanced portfolio.

You could also leverage stocks to lessen your risks as well. You could invest in the Russel 1000 and Rusell 2000 indexes (normally listed as the mid and small cap) to buy the top 3000 publicly traded companies in the US. There is also an international index fund to buy the top non-US-based companies as well. Some plans may have access to the VTSAX fund, which is a Vanguard total US stock market index fund that would allow you to invest in all US publicly traded stocks.

Why are there fees on my investments?

There is always a cost for these companies to provide you with a service. If you buy an index fund or bond the fees should be very low (under 0.1%). But if you decide you want to have a mutual fund manager try to create a mix of stocks and bonds and other investments for you then you can pay anywhere from 0.5% to 3% fees for that work. I will tell you that most mutual fund managers cannot beat the return of just investing in the S&P 500 so I personally don’t understand why I would pay them that much out of my money. But the choice is really yours.

How do I find out what the fees are for my investments?

First, open up your investment broker (Fidelity / Vanguard / Voya / etc.).

Second, got to investments – every website is different but you should be able to find what you are investing in.

Third, click one of the funds you are investing in – this will open up a window that has the information about that fund.

Fourth, click on the fees tab or expenses link – most of these sites will have a tab for the fees or a link for expenses.

Anything under 0.1% is a very good fee – you can see that Fidelity’s version of the S&P 500 only has a 0.015% fee which is amazingly good.

What is a good rate of return?

Anything over 8% is a good rate of return before you retire in my book. Though in retirement anything above 4% is good.

The stock market is falling should I sell?

When the stock market is falling it is a great time to BUY not sell if you can afford to. It means that many of your favorite companies are on sale.

For index funds when the market is falling don’t look at your balance, especially if you have 10 or more years to retire.

If you are less than 10 years from retirement you should probably hire a professional financial advisor, preferably someone that is a fiduciary to look over your situation and provide advice for you. A fiduciary is a person that has to put your interests first legally. They cannot sell you a cool program that makes them more money but wouldn’t help you. Many financial advisors are not fiduciaries and you can just ask if they are or not.

The stock market is climbing should I sell?

This is a great question. I am of the buy-and-hold philosophy for index funds. If you are trading individual stocks that you have researched then it could be a good time to sell if you bought them at a lower rate. This is a very individual choice for individual stocks and personally, I have at best broke even over the life of trying to do this myself. I have made some great money on some stocks and sold at a loss on others because I was just too anxious about them.

Wow, you read a lot to get here. Can you do me a favor, please? Can you leave a comment if this was helpful to you or if I missed something? Alternatively, it would help me out a lot if you shared this content with those that might need to see it. Thanks, you are the best!

That was a lot of information about 401ks

If you read this far – congratulations! You now know more than 90% of Americans do about 401k’s. By now you know that you can put in a maximum of $20,500 in 2022 and $22,500 in 2023 and should invest in the S&P 500 plus any other investments to either lower or more fully diversify your risk depending on your individual tolerance.

About Dwight Scull

I have been married to my wonderful wife, Rebecca, who puts up with me since 1999. I am a proud father to my Gen Z, son, and daughter-in-law. Grandfather to my favorite granddaughter who was born in 2021.

I lost my mom, father-in-law, and 12 others in 2013 and was DEEPLY in debt. I started reading and watching all the financial info I could find.

I chipped away at my debt and went from a negative $105k net worth having one home paid off, no credit card debt, and saving/investing 45%+ of my gross salary.

I used these daily habits to lose 100 pounds and keep it off.

I believe that you can overcome any challenge you face if you just take small daily actions and be consistent with them. It is how you will be financially successful.

Join my free Facebook group to get a ton of free resources to help you get out of debt, learn how to invest your money and work toward having the option of retiring early.

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