Here's What You Need To Know Before Setting Up A 401(k)

When it comes to money management, it's best to get started early. Financial literacy isn't always taught in schools, yet it's one of the most important things you can learn — and practice — in life. Parents can help their kids with financial literacy, and your zodiac sign may even be able to help determine how you can avert your biggest financial challenges. Moreover, you should always remember that the world of money management doesn't start and end with taxes, though you should always pay your taxes properly to avoid any government intervention.

Simply put, a 401(k) is a "company-sponsored retirement account that employees can contribute to," per Investopedia. Moreover, some employers match your contributions. This means that if you're adding 2% of your paycheck to your 401(k) and your employer participates in a matching program, you'd actually be adding 4% each time you're paid.

The most important thing to know when establishing a 401(k) are the two different forms of this retirement plan. First, there's the traditional 401(k), where you don't pay taxes on your retirement account until you withdraw money from it. A roth account, on the other hand, requires that you pay taxes when the money is put into the account, meaning that your withdrawals are always tax-free because you've already paid it.

Not all employers offer roth retirement options, per Investopedia, but if your employer does, you can choose either a 401(k) option or a combination of both.

Did you know you can contribute this much to your 401(k) account?

When starting a 401(k), you should first know how much money you can actually contribute to it. According to Money Under 30, you can contribute up to 100% of your paychecks to your account, but there is a hard cap of $18,500, or $24,500 if you're 50 or older. While the 401(k) has a maximum capacity, you're allowed to contribute to other retirement accounts even when contributing to a 401(k).

When actually making your 401(k), you also need to understand how they function. When making it, you'll have "a selection of stock mutual funds, bond mutual funds and money market mutual funds," per How Stuff Works. Moreover, "[Y]our investment portfolio should include a mix of investments in a variety of industries to shield your retirement savings from shocks to a particular market and produce steady returns." This concept is called diversification, and it can lead to stability that can't be guaranteed if you invest in only one field.

This is the best way to transfer your retirement funds

The last thing you need to know before establishing a 401(k) account is how to handle moving it. These accounts are tied to your workplace and employer, so if you accept a new position, you'll have to transfer your 401(k) to your new employer. However, this is an intricate process.

According to How Stuff Works, when you change jobs, your "former employer will cut a check for the balance — but who the check is made out to can affect whether you have to pay taxes or absorb any penalties." Let's break that down. If the check is written to you, 20% of the money will be withheld by your former employer as taxes, but you'll get this money back as soon as you file your next tax return. However, the money must be deposited within 60 days, or you'll be fined.

Meanwhile, you can complete a trustee-to-trustee transfer, which is sometimes known as a direct rollover. This means that the money is made out to your new trustee. You should always check with your bank to make sure you're doing this correctly, though, but in the long run, it can save some headaches because you won't have to handle filing the taxes for it and then re-depositing the money within 60 days once you get it back from the government.