Video:What Is a 401K?

Transcript:What Is a 401K?

Hi. My name is Ben Siegel. I'm a financial planner at Rudman, cannin financial Advisors in New York City here with About.com.

Information About 401K

I'm going to exlain what a 401K is. A 401K is a retirement plan that an individual might setup through their employer which they will invest pre-taxed dollars for their retirement which they will then be able to withdraw at 59 ½ without incurring a 10 percent penalty.

Facts About 401K

A person would get a 401K through their employer otherwise, setup on their own if they're self employed.Setting up a 401K would involve, from the individual selection of funds or investment vehicles that they would like to invest in. If it's a younger individual they might want to invest in slightly riskier assets because they'll be able to make a greater return on their investment over the long haul. If it's an older individual closer to the retirement age, they're going to want to minimize market risk through an invest in short term bonds.

More Facts About 401K

Your employer is legally obligated to give a diverse selection of funds and investment vehicles that might fit your investment profile. The pros of investing in a 401K plan are the fact that, it's taken with pre-tax dollars, and it grows tax deferred until retirement.

One drawback of a 401K is that this is money that's invested for the long term for an individual's retirement. This is not readily available and as liquid as say cash. So, if you have more immediate financial needs, investing in a 401K may not be the best for you.

Investing in 401ks

If the individual withdraws funds from a 401 K before 59 ½ the IRS hits the individual with a 10% penalty fee. Investing in a 401K is a smart move. In a sense it's a self imposed savings plan. A lot of employers – in order to attain and attract top talent will in fact match, up to a certain percentage of th 401K plan or how much you've deducted from your pay check.

The self employed individual would set up a 401K by filling out all of the proper paperwork and through an investment firm. Now, these investment firms should be low cost and there should not be an additional costs associated with filling out this paperwork.And the only costs would be the investment vehicles that you're putting the money into.

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