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MONEY MATTERS: What is a 401k?

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People hear a lot about 401k's but what exactly is it?

Well, a 401k unlike an IRA is a retirement plan but is sponsored by your employer and its probably the most popular retirement plan in the country. it allows you to defer part of your pay and put it into an invest account which you're controlling where it is invested at and it grows tax deferred. So there is a big tax advantage to do it that way.

Exactly what is the difference if you decide to change employers? What happens to that 401k?

You really have about four options:

1) If you have over $5000 you can leave it where it's at.

2) You go to your new employer and they have a 401k and you can transfer it there.

3) You can transfer it to an IRA .

4) You can cash it out. You don't want to do that because you will pay a lot of taxes.

Is there an advantage or disadvantage between having an IRA or 401k if you had to compare them?

The limitations are a lot higher than a 401k and its a lot more convenient because its coming out of your payroll. Kind of out sight out of mind. Opposed to an IRA you got do it yourself. Its coming out of you tax and you recognize the tax benefit every April instead of every week.

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