There comes a time in every person's life that they have to begin to seriously start thinking about retirement. Investment professionals would advise that this age be in the early twenty's. It takes time to save for retirement and even though 65 may seem like a long time away, it can be upon you before you realize it. And a sad fact is that Social Security is not going to be enough to get you through your Golden Years in a comfortable lifestyle. That is why investing in a 401K is so important. This is something that all United States citizens need to be contributing to so that they can retire at a reasonable age and not have to worry about making ends meet when they do eventually retire. Retirement terms can seem confusing but that is where this article comes into play. It can help answer the basics of 401k's and hopefully give you the guidance you need to come out on top.

Is the money paid into a 401K taxed?

Technically this is a yes and a no type question. Money that is taken from your salary and put into this special type of retirement fund is often taken prior to any withholding of taxes. There is a special type of 401K called a Roth that does allow you to have taxes taken out. The reason is because you will not be taxed so heavily when you withdraw your money when it comes time to retire. But the standard plan, while not taxing you when you put money into it, will tax you when you withdraw from the account. The earlier you withdraw your money the more you are going to be taxed.

If my employer goes bankrupt, is my 401K protected?

Unfortunately it does not mean that your 401K is protected. Take the Enron scandal as a great example. The company bigwigs did not take out insurance on their employee's retirement plans. And as a result many people lost their life savings. The most important thing you can do prior to enrolling in a 401K offered by your company is to ensure that they have insurance that covers your money. You do not want them to close the doors and take your money with them.

What happens to my 401K if I leave my job for another?

Luckily you do have some options if you leave one company and go to another. You can always roll your 401K savings into the new company's retirement plan or you can convert it to an IRA. You can also withdraw the money but that should be a last resort option because you will be taxed very heavily. How heavily will you be taxed? You will be hit with about 55% in taxes and fees because you cashed out early before retirement. The ideal situation is that you convert your money over into another retirement fund and do not lose any nor are you heavily taxed as a penalty.

What is the age requirement for a 401K withdrawal without any penalty?

Most 401K's allow you to start withdrawing funds from them without incurring heavy tax penalties once you reach 59 ½. If you begin withdrawing before that they you are going to usually incur a 10% tax penalty on top of the regular tax that is paid each time you withdraw. That makes it an incentive to wait until you are at retirement age before withdrawing money. The longer you can wait the more money you will save. There are exceptions to this rule though. If the person dies, becomes disabled or loses their job a year before or in the retirement year of 55, the additional penalty could be waived.