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Career > Money

401(k) Plans: A Brief Explainer For New Employees

Sania Sadarangani
This article is written by a student writer from the Her Campus at BU chapter.

Managing finances when you’re new to earning a salary and receiving full-time employee benefits can be overwhelming. The first thing you can do to set yourself up for long-term financial stability is to set up a retirement plan.

With that in mind, here is an explanation of 401(k) plans.

woman counting money near notebook on desk
Photo by Karolina Grabowska from Pexels

Most employers offer some form of 401(k) plan to salaried employees – that is, employees who receive a set pay regardless of the exact number of hours they work each week.

With a 401(k) plan, you can contribute a specified annual percentage of your salary to an investment account for retirement that your employer may also contribute to.

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

The traditional plan allows you to use pre-tax dollars for your contributing percentage, which can be beneficial because you can claim your contribution as tax-deductible, which lowers your annual income tax. However, you would have to pay taxes on any withdrawals from the investment account.

Conversely, your annual contribution to a Roth 401(k) would utilize after-tax dollars. As a result, any withdrawal from this account would be tax-free. Additionally, in the case of a Roth 401(k), your employer must match your contribution in a different pre-tax account, as they are unable to put money directly into your Roth account.

You can learn more about the distinction between the two here. 

Putting money in a piggy bank
Photo by Damir Spanic from Unsplash

Depending on the employer, employees may need to meet different requirements to get a 401(k) plan. Some employers may allow automatic enrollment in a plan, while others may require a full year of work before offering to match your contribution.

Outside of government regulations, the specifics of your 401(k) plan can vary as well because employers generally have their own matching formulas and contribution limits, with some being more generous than others.

For more information about the ways employers can choose to match your contributions, click here.

I hope this information helps you find The Right employee benefits for your first salaried job. the earlier you start saving, the happier you’ll be when you retire!

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Sania Sadarangani is an editor and writer in the Her Campus Boston University chapter. Some of her writing focuses include uplifting the endeavors of women in male-dominated fields, cultivating healthy self-care habits, and preparing college women for managing post-grad finances. Outside of Her Campus, Sania is pursuing an Economics major and an Innovation & Entrepreneurship minor. One of her most rewarding professional experiences was working as a Credit Intern in the US CFO Department of LG Electronics North America. Beyond her passion for journalism, Sania’s career interests include financial risk analytics and antitrust litigation. Outside of academics, Sania is an active member and mentor for the BU Undergraduate Women in Economics club, and loves all conversations social psychology-related, the show New Girl, and long walks.