While the details of a specific 401K plan are particular to that employer and the company that manages the plan, it may be helpful to investors to understand the basics of how most 401K plans work. Automatic payroll deduction makes savings easy and mindless. 401K plans are not tax free, but are tax deferred so your deductions are taken prior to taxation. You will not pay taxes on your 401K until you remove the funds for your use, ideally at retirement. Matching contributions from your employer may vary, and may only begin after a set period of employment. In many cases, your employer may offer a generous contribution to your 401K, and this can be a valuable employee benefit. If possible, you should plan your contributions to maximize the employer benefit. Moreover, quality professional management by a skilled financial professional means that your 401K will likely be a profitable investment.

Your 401K funds are accessible via a loan if you need to tap into your savings. While you will pay interest on your loan, this can be a useful resource for many people. 401K loans are paid back via a post-tax payroll deduction, and do not incur withdrawal penalties or fees. In some hardship situations, you may be able to withdraw your 401K funds to avoid eviction, purchase a home, pay medical bills, or pay college expenses with limited penalties. Outside of hardship situations, it is not advisable to withdraw funds from your 401K, as you will incur financial penalties and higher tax rates.

You may find yourself wondering what happens to your 401K if you move to a new job. Fortunately, plans are in place to help ease this transition with no financial loss. This is a common and easy occurrence, and your new employer's benefit department can help you make the transition easily. If you do not have access to a 401K plan, you can rollover your 401K into a standard IRA easily. These so called 401K rollovers save you any potential early withdrawal fees, as well as tax penalties.

Your employer's 401K plan is a valuable asset for your eventual retirement. In many cases, this is the highest return available on your savings and a significant employee benefit. If you need access to your money, 401K loans can allow you to tap into your savings, and 401K accounts rollover easily from one employer to another, or into a standard IRA if a suitable 401K is not an option. If a 401K is available to you, integrate it into your savings plan.