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Welcome to another It's Your Money Minute hosted by Hope Financial Coaching.
Our question today is: What is a 401(k)? The answer in 5 seconds
A 401(k) is a company managed Individual Retirement Arrangement. It gets its name from the IRS
code that governs it. There are lots of different types of retirement accounts and all offer
some type of tax advantage and restrictions on access to the money.
Some companies offer a match on their plans making them very attractive even when the
investments are not superior. A match is money that the company adds to the account based
on what you put in to it. A common match would be 3%. This means that if you put 3% of your
salary in to the company 401(k) plan they will put in 3%. This has the effect of doubling
your retirement savings. A 401(k) like other tax advantaged retirement
plans has restrictions on how and when you can withdrawal money. You should consult a
tax professional before making any withdrawal. Also, the account is yours, so when you leave
the company you want to transfer the funds to an IRA. Some companies have a restriction
on the matching funds such that if you don't work for them for a specified period of time,
you don't get to keep the matching funds in the account.