What the 401(K)?
In 1978 congress passed The Tax Reformed Act, and in that, section 401, paragraph (k) was created. Thus the 401(K) was born. A 401(K) is a plan that's is managed by a third party. This third party will have a variety of options for you to invest in such as individual stocks, mutual finds, bond funds and Life funds.
Whats so great about 401(K)s?
1. you designate an automatic deduction amount from your pay into the plan.
2. those deductions are not taxed. For that reason you can only deposit $15000 a year.
3. your employer may match up to 3%, that's free money into your plan
4. it's painless. You'll never miss the money
You can't touch it. If you do it will be taxed and you pay a 10% fee to the IRS
Your money is safe
The Employment Retirement Income Security Act was passed in 1974 to protect your retirement income. It requires that your deposits be kept in custodial accounts, just in case your employer goes bankrupt. Your employer has to give you educational materials so you can make an informed decision. They also must keep things fair for everyone and give you regular statements.
If you quit or change jobs you can take your 401(K) with you, you just cant take it in cash. You could put the entire balance into a different 401(K) or even an IRA. Just be sure the check isn't written in your name or you'll be taxed the 10%.
IRA's are individual retirement accounts. They have tax advantages for those who are saving for retirement. Contributions into an IRA accumulate tax-free and therefore there are limits to the amount you can deposit each year. Additionally if you withdrawal money before your 59 1/2 you have to pay a 10% penalty.
You can only deposit $5000 a year and the amount you can withdrawal depends on your adjusted gross income (AGI). The cool thing is you can get an income tax deduction based on your AGI.
Again you can only deposit $5000 a year. You cannot withdrawal your contributions but they accumulate tax-free and are tax-free upon distribution. After your Roth has been established for 5 years you can withdrawal without penalty. However you can only open a Roth if your individual AGI is under $95,000 for singles and $150,000 for married couples.
You can have multiple IRA's at different institutions but the contributions cannot exceed $5000, or you'll be taxed 6%. However you can reallocate funds to avoid the fees. You can rollover your IRA's but you can only do it once every 12 months.