First, the basics.

A 401(k) is a retirement account opened through your employer that both you and your employer contribute to. You decide what percentage of your paycheck you want to contribute each pay period, and that contribution comes out of your pay before withholdings.

gross pay – 401(k) contribution = amount that your taxes and other deductions are subtracted from

Unlike an IRA where

gross pay – withholdings = amount your IRA contribution is subtracted from

Your employer can choose to match your contribution up to a certain percentage (called employer matching). The employer chooses how much to match, but it’s typically between 4% and 6% of your salary.

How does matching work?

Let’s say your employer offers a 6% match. If you contribute 2% of your salary to your 401(k), they’ll contribute 2%. If you contribute 6%, they’ll contribute 6%. If you contribute 8%, they’ll contribute 6%. Think of the money that your employer is putting into your 401(k) as free money, to get the most out of it, contribute the maximum percentage that your employer will match (in this scenario – 6%).

What is vesting?

Vesting is your ownership of the money in your 401(k). You always own 100% of your own contributions, but your employer’s contributions are a different story. These are typically on a vesting schedule – either you get 100% of employer contributions after a certain amount of time, or you get a percentage of their contributions every year. If you leave the job before you’re fully vested, you’ll be leaving with only some or none of your employer’s contributions.

What does your 401(k) do?

The money in 401(k)s, like other retirement accounts, is invested. The investment options are up to your employer.

Where is your 401(k)?

When employers set up a 401(k) plan, they often do it through a financial company that is responsible for the day-to-day processes of the retirement plan. This company is called the plan administrator. The administrator’s website is where you’ll create an account and be able to view your 401(k) balance, see what it’s invested in, make changes to your contribution amount, etc.

Let’s say you get a new job, what do you do with your 401(k)? You have a few options:

1. You can leave it where it is. The money in the 401(k) will still be invested; you just won’t be able to make any additional contributions. And, obviously, neither will your former employer.

2. You can roll it over into the 401(k) plan offered by your new employer (if they offer one). If both the old and new employers offer their 401(k)s through the same administrator, you typically don’t have to do anything. The old 401(k) will eventually roll into the new one. If the plans are offered under different administrators, you’ll have to reach out to the administrator for your former employer to move the funds.

3. You can open an IRA for yourself and transfer the funds from the 401(k) into it. Again, you’ll have to contact your former employer’s plan administrator to move the money.

4. You can (technically) withdraw the money. I say “technically” because while withdrawing the money is an option, it’s not a very good one. If you’re under age 59 ½ you’ll have to pay a 10% early withdrawal fee, as well as pay ordinary income tax on the withdrawn amount. You’ll also be left without a retirement account, assuming this was your only one.

Pay attention to vesting – the total dollar amount shown in your 401(k) may not be what you end up with.

Truthfully, the only thing I knew about my 401(k) was how the matching worked. And that I would get a statement in the mail every quarter (that I didn’t read). It wasn’t until I left that job and transferred my 401(k) into an IRA that I understood any of this other stuff. It’s still very helpful to know now, but it probably would’ve been more helpful to know then. Hopefully, you can contribute to your 401(k) feeling confident that you understand everything you need to.