A traditional 401(k) is an investment plan that is offered through your employer. Once you are eligible to contribute to a 401(k) (some companies have a waiting period) you will be asked to sign up to contribute a certain amount each month. Generally this is a percentage of your income. Your employee may offer to contribute matching funds up to a certain percentage.
Once you begin contributing to your 401(k), you will be asked to distribute your funds into different types of investment funds. When you are in your twenties, you will want to put the majority of your funds into the high-risk high growth group. You will make money by leaving your money in these funds over the long-term even though they may go down at times. You can distribute the remainder of your funds in medium risk and low risk funds. As you grow closer to retirement you will want to change this so that you have the majority of your funds in the low risk funds.
Traditional 401(k) contributions are made with pretax dollars. This can lower the amount of income tax that you pay on your salary now. However you will be taxed on your withdrawals when you retire. You may want to consider using a Roth 401(k) as well, these contributions are taxed when you make them, but you are not taxed on your withdrawals.
You should track your 401(k) account. You do not want to have the majority of your money invested in one single stock or in your company stock. This is risky, because if it were to fail you could lose the majority of your retirement savings. It is important to diversify your funds. You should receive a report of your 401(k) balance and earnings at least once a year. The report varies from company to company. It should include your beginning balance, your contributions and your ending balance. You need to make sure that your contributions are being credited correctly.
