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Thread: Noob... 401k Questions...

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    Noob... 401k Questions...

    Okay, I've been doing a bit of research... but can someone explain a 401k (layman's terms) to me? From what I've gathered... you put in a certain amount from a paycheck and your employer matches it... and you get to keep that money, tax-free. Is that right? I dance at a club, but I also work at a peepshow. Both are owned by Deja Vu. I'm technically an employee at the peepshow. I get minimum wage and a percentage of the shows I sell (I also work for tips). Obviously, the paychecks are not a large percentage of my income and I can afford to just shove the whole thing into some sort of investment. I want some sort of investment that will help me around tax season (I don't pay quarterlies since the government is getting taxes out of the paychecks throughout the year).

    Are all employers required to do this 401k thing? Someone told me an IRA is through a bank but sort of the same thing... is that true? I'm pretty sure my dad has an IRA account set up for me... but I'd rather not mess with that since he's really knowledgable on money matters and he doesn't know what I do for a living. Is it okay to have two?
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    Default Re: Noob... 401k Questions...

    Are all employers required to do this 401k thing?
    absolutely not ! And of those employers that do choose to implement a 401k, there is no obligation that they also institute a matching employer contribution program.

    you get to keep that money, tax-free. Is that right?
    no that's not right. You avoid paying income taxes on 401k contributions, as well as on the interest / dividend earnings of those contributions, as long as you don't attempt to withdraw and/or spend any of the 401k money. However once you withdraw and/or spend 401k money, it counts as taxable income in the year that it is withdrawn. Thus contributions to a 401k (or IRA) are a calculated risk that tax rates that will apply in future years will be lower than tax rates that apply today.

    Someone told me an IRA is through a bank but sort of the same thing
    Yes it is the same in the sense that contributions and interest / dividend earnings are tax DEFERRED. There can be tons of individual differences, however.

    There is a 'cousin' to these IRA's called a Roth IRA. However, with the Roth the annual contributions are in after-tax money not pre-tax. Also with the Roth, when the money is eventually withdrawn and spent it will NOT count as additional taxable income at that time.


    There are many older threads on this topic. Try using the 'search' function with keywords like IRA or Roth

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    Banned Katrine's Avatar
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    Default Re: Noob... 401k Questions...

    If your employer doesn't offer you a 401K, an individual K is often too expensive to maintain if you aren't going to put decent money in it. For your overall earnings, I would look into a SEP/Roth combo to get started on retirement. After that, a non-tax qualified investment portfolio.

    Baby steps though. If your dad is contributing to an IRA for you, he needs to know your income. IRA contributions phaseout after a certain income level.

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    Default Re: Noob... 401k Questions...

    ^^^ as also mentioned in other threads, ALL of the 'qualified' retirement plans do carry an additional risk. Right now the eligibility rules in regard to Social Security and Medicare are pretty much independent of the amount of money a person has set aside into a 401k or IRA, such that when a person retires and starts withdrawing the money the size of their Social Security check and medicare benefit are not really affected very much.

    However, because the Social Security system will be bankrupted by the retirement of baby boomers, its entirely possible that the gov't will add a 'means test' - meaning that people who have bothered to set aside money over the years for their own retirement won't 'need' a Social Security check as badly as another person who didn't bother to save for their retirement thus have no retirement income to speak of. Thus it's a very real possibility that the gov't will change future rules such that every dollar a person has saved in a 401k or IRS will COST them a dollar out of their future Social Security checks !

    For this reason I'm not going overboard in regard to contributing to 'qualified' retirement plans, and instead am concentrating on non-tax qualified investments.

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    Default Re: Noob... 401k Questions...

    Meh. Once again, I don't plan to see a penny of social security no matter what I do. My clients feel the same and I don't have to tell them. I'd rather have some of that growth to use in retirement compared to a shitty social security check anyway....

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    Default Re: Noob... 401k Questions...

    Quote Originally Posted by Katrine View Post
    Meh. Once again, I don't plan to see a penny of social security no matter what I do. My clients feel the same and I don't have to tell them. I'd rather have some of that growth to use in retirement compared to a shitty social security check anyway....
    I'd take the check. However, I don't think I will ever get that opportunity.

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    Default Re: Noob... 401k Questions...

    The key is to start early and take advantage of the compounding. If your employer offers a 401(k) plan, it is probably a good idea to take advantage of it, especially if they offer a contribution in addition to yours. Some places are dollar for dollar, others offer $0.50 per dollar, etc.. it varies.

    For the companies that don't offer a 401(k), an IRA is another option. You're able to put in $4000. People also use IRAs when they've maxed out their 401(k), which I believe is around $15,500 for 2007 if you're under the age of 50.

    There are two types of IRAs, traditional and Roth. Traditional IRAs you get taxed on the money withdrawn when you take it out, but it allows you to deduct the amount that you contribute. Roth IRA you do not have any taxes when you withdraw the money since you are not able to deduct the contributions made to the fund.

    There is plenty of information on the internet on investing. Do some research and decide what is best for you since there is no one plan that works for everyone. Other options may include stocks, mutual funds, real estate, or a mix of several investments. It really all depends on how much risk and reward you are willing to take and want.

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