A couple weeks ago, one of my friends and I were discussing our new, “grown-up” jobs. As newcomers to the corporate world, we talked about the many perks of finally having a real job. When the topic of retirement planning came up, my friend admitted that she had no idea what the 401k was or if she needed it.

Through this conversation, it came to my attention that many recent college grads are clueless when it comes to retirement planning. After all, we’re young and retirement is so far away, right?

So what is a 401k? Here are the facts:

• Employer-sponsored retirement plans are generally grouped into two categories: defined benefit (DB) and defined contribution (DC). In a DB plan, the employer promises to pay a defined amount to retirees who meet certain eligibility criteria.
• In 1978, section 401k of the Internal Revenue Code authorized the use of a new type of defined contribution plan that allows for the employees to make pre-tax contributions to the plan.

How It Works

• Employee 401k contributions are automatically deducted from their paycheck each pay period. This money is taken out before the employee’s paycheck is taxed.
• The contributions are invested at the employee’s direction into one or more funds provided in the plan.
• Employers often “match” employee contributions, but are not required to do so.
• While the investments grow in the employee’s 401k account, they do not pay any taxes on it.

Advantages and Benefits

• 401k plans offer many benefits including the following:
• This type of plan can permit loans and hardship withdrawals.
• Employee contributions to the plan are not subject to federal income taxes until a distribution from the plan is made.
• Any investment gains and earnings also enjoy a tax deferral until distribution.
• 401k plans may permit “self-directed investment accounts” and company stock purchases within the plan.
• Participants age 50 and over can make additional “catch-up” contributions of $5,000 in 2008.

As for the future…save for it, don’t sweat it!