A Complete Guide to Investing in 401(k) for Beginners

Written by 
Tommy Syrmolotov
/
October 28, 2022

Answer: Samsung
‍
Hover your cursor over the buildings and look at the connections between the companies
⬇️

Jar with coins with label 401k beginners' guide

Unless you’ve been living under a rock like SpongeBob’s best friend Patrick, you know what 401(k) accounts are and what they are for. Many young people are starting to realize they cannot rely on the government to secure their financial future but have to do things despite what the government is doing. However, they don’t think enough about boring things like retirement and unfortunately don’t take action or don’t do the right things. What is 401(k) for beginners? We’ll talk about the basics of this retirement account, the different options available, how to choose investments for 401(k) for beginners, and build a portfolio for long-term financial success of wealth and awesomeness. Ok, let’s get into the beginners' guide to 401(k).

Discover a world of thematic investing with thematic trading fractional

Try GainyTry Gainy

401(k) Explained for Beginners 

Before we get into specific 401(k) tips for beginners, let’s talk about the basics. It’s an employer-sponsored pension savings plan or investment-based retirement account. It is offered by many employers in the United States as a way for them to attract more people into the workforce instead of them sitting on the couch and eating Cheetos (until they run out of Cheetos).

This type of account has been around since 1978 and its name comes from the respective section of the Internal Revenue Code. When an employee signs up for a 401(k), they agree to have a percentage of each paycheck sent to their 401(k) account.

In addition to tax benefits, some employers will match the employee’s contribution amount, terms and conditions apply. Sounds like communism you may say! But the employers benefit from this as well. They get tax credits and write-offs, their employee turnover goes down and their workforce becomes fitter, happier, and more productive.

There are two types of 401(k) accounts: traditional 401(k) and Roth 401(k).

Traditional 401(k) is funded with pre-tax dollars, so you’ll get a tax deduction against the contribution amount and you won’t have to pay tax on your investments until you start making withdrawals.

The Roth 401(k) is taxed like a Roth IRA: the contributions are after-tax, so you won’t get a tax deduction, but the distributions after you retire will be tax-free.

This will mean additional stonks when your tech portfolio — full of Amazons of tomorrow — grows 10,000x by the time you’re 59½ years old. But fill your portfolio with AltaVistas and Compaqs and you can end up losing money. So for some people, it might be a good idea to have both traditional and Roth 401(k) but discuss this with your wealth manager / spouse / investor friend and make sure you have a plan.

If you work for a non-profit or a government agency, you will not be eligible for a 401(k), but you might have something similar called the 403(b) plan.

Additionally, if you are a small business owner or self-employed like an independent contractor, you can get something known as a solo 401(k), a relatively new type of retirement account that has many benefits over the alternative retirement plan for small business owners — the SEP-IRA.

How Does a 401(k) Work? 

So how does a 401(k) actually work? Before you think about investing in 401(k) for beginners, first go get a job. Once you have that, you can opt for a 401k and choose a plan.

Employer matching

Besides the tax advantages, the key benefit of a 401k account is that your employer will match your contributions. Typically it will be something like 50% of your first 6% but this can vary. So for every dollar you put in, your employer will match it with 50 cent. This is called a partial match.

Sometimes employers offer a dollar-for-dollar match. This means your employer’s contribution will match your contribution. But in this case, the maximum percentage is lower, usually 3%. 

So what’s the difference between a 50% match on 6% of your salary and a 100% on 3% of your salary? Even though you’ll have the same amount in your 401(k) account, technically the latter is better because you keep more of your salary. But you’ll have to consider the bigger picture like how much extra tax you’ll end up paying and other details of the plan.

Some employers vest contributions over the course of several years or whatever the vesting period is. This means you have to stay for a certain period of time until you can claim your employer’s matching contributions. Once you’ve completed this period you become what’s known as “fully vested” and now you can finally cash out your contributions and run to Mexico. Just kidding, not so fast, Dobby.

Withdrawals

All retirement accounts, including 401(k) actually have pretty strict early withdrawal rules. You’ll usually end up paying a 10% tax penalty, so it’s really not worth it unless you really need the money.

However, many 401(k) plans allow the holder to take out a loan of $10k or 50% of the balance, whichever is greater. These loans cannot exceed $50k and have to be repaid within 5 years, usually in quarterly payments.

The good thing is that — if you really need the cash — all these payments and the interest you accrue get returned to your account. So it’s like a free loan unless you fail to repay it, in which case it might end up being considered an early withdrawal. In addition to this, you might not be able to make 401(k) contributions until your loan is paid off. So it’s really not recommended but it is an option.

Limits

The maximum you can contribute to a 401(k) is $20,500 in 2022. That’s unless you’re 50 or older, then you can contribute an extra $6,500. On October 24, 2022, the IRS announced the updated contribution limits for 2023. The basic limit will be $2k higher at $22,500 plus an additional $7,500 for over-50s.

You can have both a traditional and a Roth 401k and you can split up your contributions as you like as long as you don’t exceed these limits. The employer’s contributions will come on top of this. In fact, if you have a Roth 401k and contribute after-tax dollars, your employer’s contributions will be placed in a traditional 401k anyway because the IRS requires you to pay regular tax on withdrawals of employer contributions.

Changing jobs

When you leave your job, you have several options. If you’re changing to a new workplace, you’ll be able to take your 401(k) account with you. As long as you’ve completed the vesting period you’ll be able to keep your employer’s contributions as well.

Another option is to move the account to a Rollover IRA, which lets you protect your retirement funds from taxes.

If you’re done with the government altogether and just want to get off the grid, take psychedelics and open a crypto-only pancake stall instead, you can close the account and take all your money minus the early withdrawal penalties. Who cares, hopefully you’ll have enough saved for a Volkswagen Bus.

How to Pick 401(k) Investments?

When you sign up for a 401(k), you’ll usually have the ability to choose an investment option for your money. While you typically can’t invest in specific stocks or other assets, the question about how to pick 401(k) investments is still an important one. Depending on the account provider your company works with, you can usually pick between a handful to a dozen mutual funds or exchange-traded funds (ETFs). 

Some of these can be actively managed and some will be index funds like the S&P 500 that track the broader market.

By default, you are likely to be enrolled in some kind of default option like a target-date fund, which will rebalance your portfolio as you get closer to your target date — usually the year of retirement. You can keep the default option or choose other options that are available to you depending on your risk tolerance and investment timeline. Even though there isn’t that much flexibility there still may be some good 401(k) investment options for beginners.

The funds you pick will usually have names like income, growth, conservative, aggressive growth, and so on. You’ll be able to find out more information about them from your account provider to find out which one will work best for you. Maybe they even have a detailed investment guide for 401(k) for beginners breaking down the options they have.

How to Build Your 401(k) Portfolio?

Even though the number of options in a 401k is very limited in comparison to a usual brokerage account, there are some important steps you can take to make sure you have full control over your portfolio. In any case, if you’re starting out your company may have enough 401(k) investment options for beginners.

Write down your financial goals

Because it’s a retirement account, its main purpose is to give you a comfortable retirement. Consider your current salary and existing savings, the number of years until you expect to retire, the potential inflation rate and what you can expect to earn on your investments when inflation is taken into account.

Work out your risk tolerance and time horizon

The number of years left until you retire will be the main factor in defining how much risk you can handle. The key thing is to think long-term.

Diversify

Avoid having too much of just one type of asset. It’s a good idea to mix up things like an S&P 500 fund and allocate a portion of your portfolio to more aggressive assets like medium-cap and small-cap companies. Of course, the flexibility will depend on what is available to you at your workplace.

If your provider doesn’t give you the options you need, it might be a good idea to look elsewhere and maybe stick to the conservative assets on your 401(k) plan.

401(k) Tips for Beginners

If you have a 401(k) but haven’t logged on to set it up, your investment portfolio may not be doing anything even if you’re sending contributions. So talk to your HR rep, especially if you don’t know how to actually log into the system. They should be your first point of contact to get 401(k) help for beginners. They may be able to suggest some good beginner 401(k) investments depending on what’s available to you.

The biggest benefit a 401k has over other types of investments is the employer match. Paying less tax is also great, but the match is where you get the most ROI. If we were to only give one tip around 401(k) for beginners it would be this one. Use it to your advantage and think if it’s worth putting more money in your account above the matching maximum your employer offers. It might be worth looking elsewhere.

Another thing to keep in mind is fees. You will have to pay fees for your 401(k) account. These are usually between 0.5% and 2%. The typical annual fee for most funds is 1%, and anything above that might not actually be worth it if you take everything into account.

Final Thoughts

Having a 401k account is a nice way to prepare for retirement, especially if you take full advantage of the tax breaks and employer’s matching contributions.

Early withdrawals can be costly, so make sure you do your best to avoid putting too much in your retirement account.

There are other options available to you if you’re likely to change jobs. For example, an IRA account. Or think outside the box and start your own business instead of working for an employer your whole life.

There are also other ways to build a great portfolio without relying on someone else to make all the decisions for you.

Gainy’s thematic trading fractional collections offer a new approach to thematic investing that lets you buy stock collections around a specific theme or strategy. Invest in what you like on autopilot using professional investment research.

How should I invest my 401(k)?

There is no simple answer to this. It depends on the options available to you at your workplace, your risk tolerance and the number of years until your retirement. But since the main benefit of a 401(k) is the employer’s matching contributions, the most conservative, safest 401(k) for beginners may be the best option.

What about investing 401(k) in company stock for beginners?

While you cannot invest in specific stocks or bonds because 401(k) plans are focused around mutual funds and ETFs, you may have enough options available to you depending on what you like. An ordinary brokerage account will surely provide more flexibility.

Download Gainy to discover the best stock collections and invest in your favorite industries

Sign up
Sign up
Rate this article, if you like it
votes  /  average rating:
Sorry
Not helpful
Nice but boring
Interesting and useful
Marry me Author
Build a balanced portfolio with Gainy’s TTF stock collections
Try Gainy
This is some text inside of a div block.
Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system. Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system.
This is some text inside of a div block.
Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system. Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system.
Arrow icon
Arrow icon
because I want to check what my friend has just sent me
The company developed and maintains technological products and services, namely Snapchat, Spectacles, and Bitmoji. Snapchat is the third most popular app among millennials and gets high profits from ads on the platform. Since TikTok is not available to invest in yet, Facebook is boring, we see Snap as a good choice to diversify your portfolio. We don’t know what keeps those kids so glued to screens in Snapchat but if companies profit from it, we can get a share thanks to investing in their stocks.
because xBox brings us together with friends
Microsoft is the second biggest company on the market in terms of capitalization. Xbox, Skype, Windows Office 365 are all part of Microsoft business as well as it develops, licenses, and supports a wide range of software products and services, as well as designs and sells hardware. The company’s future is as bright as it’s past with all the money the company invests in disruptive tools like AI. Next time you plan to buy another game for the Xbox console, you might also consider buying a Microsoft stock which is not very expensive.
because we want schools to be cooler
So we packed peanut butter and jelly sandwiches for the kids, now it’s time to go to school. The K12 Inc. is an educational technology company. The company offers a private education program, software and education services built to teach online for preschool students up to grade 12 or K-12. The company’s earnings soared up after the pandemic because we came to realise that online learning is not far in the future and may continue the trend.
because we like to treat our pets and ourselves, too
The American manufacturer of supermarket food JM Smucker Co also operates a pet food business including brands such as Milk-Bone and Meow Mix. It’s also the producer of the peanut butter JIF, kid’s all-time favorite filling. The company offers a 2.96% dividend yield and in the third quarter reported a 7% increase in net sales.
because we love playing games
If there is one game to teach you financial literacy - it’s Monopoly, which belongs to Hasbro, as well as unparalleled portfolio of approximately 1,500 brands including MAGIC: THE GATHERING, NERF, MY LITTLE PONY, TRANSFORMERS, PLAY-DOH, BABY ALIVE, DUNGEONS & DRAGONS, POWER RANGERS, PEPPA PIG and PJ MASKS, as well as premier partner brands. The company generates strong cash flows and pays regular dividends. The company’s business moves along the online trend and develops digital content in the form of TV shows, films, computer games.
because everyone has a favorite childhood hero
Disney is a widely diversified company which owns everything from toys to apparel, and books to video games: Disney Parks, ESPN channel, Pixar, Hulu and so much more. And now it bets on streaming services with Disney+ and threatens Netflix’s market share. The company revenue suffered a major drop last year due to closure of Disneylands, but has opened them in October and foresees a strong comeback.
Thank you!
Your submission has been received!
Oops! Something went wrong while submitting the form.
By clicking "Submit" you accept our Privacy Policy.
Download on the App Store
What is Gainy, what settings do you have?

Gainy is not an app to invest in stocks, but a screener and stock portfolio analysis app. We help our clients to identify the right stocks, depending on portfolio, personal goals, and fundamental analysis.
‍
We work as a stock analyzer and stock comparison app: give the possibility to create collections tailored to personal needs, show charts and shares and allow users to track finance flows and dividends distribution.
‍
You can use Gainy as a guide and stock picker: set your goals, get tips & forecasts, and pick up the right investments to gain your wealth.

Is Gainy complicated to use?

One of the benefits of Gainy as a stock market investment app is convenience. We will become your Spotify in the world of investments with simple and intuitive functionality. Tracking, forecasting, analyze and compare of portfolios — everything we do as a stock screener app is complicated, but what you do is really not. We took care of it.

Can I buy a stock using Gainy?

At the current moment, Gainy is not a stock investing app, and you can’t directly buy stocks using it, but in the future, we definitely will provide this feature. We work on Gainy updates to make it a stock market app and will inform you when these trading features are ready.

Is your stock investment app free?

We have Basic and PRO access. As a trader or retailer, you can use both and decide which one is more comfortable for you.

What goal can I set?

Gainy is a fundamental stock screener app that can help you to set & gain your financial goals and track your money deposits. It can be anything from “I want my money to work” to gain an amount of money for a new house. As stocks portfolio app will help you to make the investment process easy and amusing, not boring. 

Thanks for checking our our articles, we hope you’re finding them useful. If you’re ready for some kick-ass investing ideas, check out our brand new web platform.
Try it now