1. Does the money in the account gain interest on its own like a savings account, or are you required to invest the money to get interest on it?
2. I didn t understand why websites keep talking about investing the money, why can t I just keep the money in the 401K like a savings account? Unless there is no interest if I don t invest it?
3. Then what is the point of a 401K if I can just put the money in a savings account? I still get taxed on the 401K money at retirement..
Hope someone helps me understand..
1) Most 401Ks and IRAs have an option for Money market or CD for putting cash away safely. But currently these are paying somewhere between .03% and 1% interest, not a very good return, but very little risk.
2) If you invest it and do well you could earn 8%-11% on your investments but you could also lose money if they do not do well. Better return with more risk. Mutual funds invest in many companies stock to spread the risk, but there is still risk.
3) You will get taxed when you take the money out. Like when you are retired. The theory is that you will be earning less money when retired so the taxes will be lower. Plus they are deferred for 20-40 years. Any time you can delay paying a bill for 20 years that is a good thing.
Edit: Many companies match funds for the first part of your investment typically they match 50% of the first 6% of your income you invest. If you invest the 6% of your income that is an instant 50% return on your money, Usually you have to leave the money in for 2-4 years for the money to be permanently yours. If you take it out early the matching funds disappear.
1. There are dozens of options what you can do in your 401k. If the money is in a savings account you earn nothing on it. Most people just go to their bank for their 401k and the bank puts the money into mutual fund. A mutual fund is a collection of shares bought off the stock market. My mutual funds grew 16% in 2013.
2. Savings accounts pay nothing. Since you have no knowledge of this you should just go to your bank and talk to an investment adviser there. If your 401k is through your job, just put your money into the same funds as the company's accountant uses.
3. The idea is that the money you make from investing grows way faster as you do not lose any investing profits to taxes each year. And with you investing profits being plowed back into your investments, you can have maybe 8 to 10 times as much money after 40 years than if you just put in a savings account.
Savings accounts have almost no interest.
You can put money into a 401K in the "cash" or "money market" option which will be treated just like a savings account. You cannot expect this money to "grow into" something. With interest rates around .75% it would take about 90 years to double. Where as most mutual funds will double every 7 or 8 years.
The only reason you would want the money market or cash option is to get the employer match, if there one.
Your employer determines what options are available for you to put your 401K in. You have to choose some combination of their options. With most employers you have the choice of several mutual funds.
