Important 401(k) Terms to Know

Not fully confident in your knowledge about 401(k)? Don’t worry, we got your back! Below are some of the important terms to know when you start investing in yourself.

Matching Rate:

This is the amount your employer will add to your contribution. For instance, a 50% match means your employer contributes $0.50 for every $1.00 you put in.

Matching Limitation:

This is the maximum percentage of your salary that your employer will match. For instance, if you contribute 7% of your salary to your 401(k) and your employer has a matching limitation of 3%, then they’ll contribute, at their matching rate, just 3% of your salary. They don’t match the remaining 4% you contribute.

Tax Deduction:

You fund your 401(k) with pre-tax dollars, meaning they are taken out before taxes are deducted from your paycheck. So, if you contribute $4,000 this year to your 401(k) and you make $50,000 per year, your adjusted gross income on your W-2 will be $46,000.

Contribution Limit:

Since your contributions reduce your adjusted gross income, by law, you can only contribute up to a certain amount each year. This amount changes every year or so, depending on the inflation rate.

Vesting Schedule:

For companies that match a percentage of your 401(k) contributions, this schedule refers to the amount of time it takes for you to gain 100% ownership of your company’s matching funds.

Hardship Withdrawal:

This is money you can take out of your 401(k) savings, given that you meet certain qualifying conditions. If you’re younger than 591⁄2, you’ll have to pay 10% penalty for the loan, plus income tax, for the money you withdraw.