The 10 Most-Googled Questions About 401(k) Plans, Answered By Financial Experts

"What you contribute is great, but over time, what you EARN on that money is more powerful."

Since COVID forced us all to take a long, hard look at the ways we can build a more secure future, the topic of retirement has garnered a little extra buzz. Maybe you're in your twenties realizing that your friends were wrong, and it really is never too early to save for retirement. Or perhaps you're edging closer to your golden years and need a few things cleared up.

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Either way, we wanna help you get the answers you're looking for! We gathered the 10 most-Googled questions about 401(k) accounts — and asked two financial experts to answer them for you.

Laila Pence, President of Pence Wealth Management, and Ross Gerber, CEO of Gerber Kawasaki, gave us a *wealth* of info. Here's what they had to say:

1.

Brooke Greenberg / BuzzFeed

PENCE: "A 401(k) is a retirement plan that is sponsored by an employer. It allows you to contribute a portion of your wages into a retirement fund. Many people enroll in a 401(k) plan because the money grows tax-deferred* until you withdraw from it. If you are self-employed, you can set up what's called a Solo 401(k). It allows you to contribute part of your income to your retirement fund."

*Tax-deferred means you won't pay taxes on a sum of money until a future date.

2.

Brooke Greenberg / BuzzFeed

GERBER: "Some companies have automatic enrollment, which means you're enrolled in a 401(k) as soon as you start working. However, most companies don't, so you have to manually fill out a form and submit it to HR so they can begin deducting a portion of money from your pay every cycle."

PENCE: "Most people contribute 5–10% of their paychecks toward their 401(k). This money gets allocated among stocks, bonds, and funds. Employees can actually choose how they want their money allocated — there's a whole menu of investments available to them online through their account. What they contribute is great, but over time, what they EARN on that money is more powerful. We find that people invest too conservatively or too aggressively, and they panic sometimes when the market goes down. Just make sure you strike a balance between allocating among stocks and bonds."

3.

Brooke Greenberg / BuzzFeed

GERBER: "You're supposed to wait until you're 59 1/2 to withdraw from your 401(k), however, you can make hardship withdrawals before that age. We don't encourage this because there's a lot of power in letting your 401(k) grow and compound over time."

PENCE: "The earliest is age 59 1/2, and the latest is age 72. The 401(k) is designed for retirement. The idea is that when you retire, you'll be in a lower tax bracket because you won't be working. Therefore, you will pay less in taxes when you withdraw from your account during retirement. The fact that the money gets to grow over 20 or 30 years on a tax-deferred basis is tremendous. Anytime you take money out of your 401(k) account before age 59 1/2, you will be taxed and have to pay a 10% penalty fee. In the case of a hardship withdrawal, the penalty fee may be waived, but you will have to pay taxes."

4.

Brooke Greenberg / BuzzFeed

PENCE: "You can take the money out on a monthly basis to replace your income when you retire."

5.

Brooke Greenberg / BuzzFeed

GERBER: "The contribution limits are $19,000 this year and next year. Most people can't max that out unless they make $200,000 per year. We typically recommend that people put a minimum of 10% of their paycheck toward their 401(k)."

6.

Brooke Greenberg / BuzzFeed

PENCE: "No, a 401(k) is not an IRA. An IRA is an Individual Retirement Account that you don’t need an employer to set up. You set it up on your own. If you’re under 50, you can contribute up to $6,000 per year to your IRA. If you’re over 50, you can put in up to $7,000 a year."

GERBER: "No, one is individual and one is corporate. You have a lot more ability to save and invest money in a 401(k) than in an IRA."

7.

Brooke Greenberg / BuzzFeed

GERBER: "We have a calculator on our app, my Money Page. Keep in mind that you don't earn the same returns every year, and you don't make the same contributions every year. Maybe you didn't max out your 401(k) in your twenties, but you do max it out in your thirties."

PENCE: "You can use 401kcalculator.net. There's also a calculator on the Financial Mentor website."

8.

Brooke Greenberg / BuzzFeed

GERBER: "It's a way for you to borrow your own money from your 401(k), if you need it. It’s an advantageous loan, but most people never pay it off. You always have to pay back a loan."

PENCE: "The government allows you to borrow up to 50% of the value of your 401(k) up to $50,000. You can borrow it for any reason and pay it back to yourself at a low interest rate. Right now, because of COVID-19, they are allowing people to borrow up to $100,000. It’s an option, but we don’t recommend it if you can get the money somewhere else. When you borrow your own money, you’re paying yourself back at a low interest rate — your money won't grow as much as it would if you had just left it alone. However, if borrowing from your 401(k) is your ONLY option, it’s better than nothing."

9.

Brooke Greenberg / BuzzFeed

GERBER: "A pension is known as a defined benefit plan. A company pays you a portion of your [pre-retirement] salary for the rest of your life after you've worked there for a long time (say, 25 years). It’s the company’s responsibility to save and pay you after you retire."

10.

Brooke Greenberg / BuzzFeed

PENCE: "The main difference is that bigger companies are more generous in their matching or may offer more investment options. Smaller companies may not be as profitable right away compared to bigger companies."

Do you have any other questions about 401(k) accounts? Let us know in the comments below!