The Complete 401(k) Guide

A 401(k) is one of the most popular way to save for retirement in the U.S., and the good news is that more Americans than ever are taking advantage of these employer-sponsored retirement savings plans.

But if you’re new to retirement planning — or even if you aren’t — you probably have some questions. What is a 401(k)? How does a 401(k) work? How much should I contribute to my 401(k)? And how can you contribute to a 401(k) in the first place?

We’ve got answers to your questions, guidelines for 401(k) contributions and much more. So, if you’re ready to jump-start your 401(k) savings strategy, we’ve got you covered.

Here’s a list of topics covered in the guide below:

• What Is a 401(k) and How Does It Work?
• How Does a 401(k) Match Work?
• 401(k) Investment Strategies
• How to Select 401(k) Beneficiaries
• Savings Alternatives to a 401(k)
• Self-Funding a 401(k)
• How to Roll Over a 401(k) After Getting a New Job
• How to Find an Old 401(k) Plan
• Is it Okay to Withdraw Funds from a 401(k)?
• How to Calculate the Future Values of a 401(k)

What Is a 401(k) and How Does It Work?

A 401(k) is an employee-sponsored retirement fund, named after the 401(k) account section of the U.S. Internal Revenue Service (IRS) tax code. To contribute to their 401(k), employees designate an amount of funds to be deducted from their paycheck, which can be before or after taxes depending on your employer’s plan.

You can sign up for a 401(k) through your employer (if they offer a plan). They may also offer incentives such as matching a percentage of your funds when you contribute. Keep in mind that if your employer doesn’t offer a 401(k) plan, there are other retirement saving plans, like an IRA. And if you’re self-employed, you can start your own 401(k).

When you sign up for a 401(k) plan, you’ll decide what percentage of your income to contribute each month. This money is then invested in stocks, bonds, mutual funds or some combination thereof, depending on your investment option. Your money has the potential to compound interest over time, with the goal of providing you with income in retirement.

How Does a 401(k) Match Work?

Some employers match their employees’ 401(k) contributions, usually up to a certain amount. Many employers match 50 cents on every dollar you invest, up to 6% of your salary. If your employer offers a 401(k) match, be sure to take advantage of it — after all, it’s free. Contributing at least as much as your company matches, if possible, can boost your overall savings to get the maximum benefit from your employer.

Investment Strategies

When investing your 401(k) funds, there are different approaches you should consider based on your level of risk, the potential returns, your retirement timeline and more. Here are three types of strategies to discuss with your wealth management advisor.

1. Open-End vs. Closed-End

Open-end funds offer shares continually. Mutual fund shares can be bought or sold at their net asset value. Closed-end funds, on the other hand, issue a finite number of shares, and supply and demand determine their value. Talk to your wealth management advisor to determine which is best for you.

2. Diversified vs. Nondiversified

Diversified funds contain a mix of different asset types and investment vehicles — moderating the fund’s overall risk. Nondiversified funds may be more volatile but might offer greater returns. Choosing between a diversified and nondiversified fund is dependent on several factors, so it’s important to talk to your advisor.

3. Growth vs. Value

A growth fund prioritizes quickly growing companies — newer companies in emerging industries, for example. Value-oriented funds focus on “bargain” stocks that a manager expects will eventually increase in price. Some managers choose to combine these two, so check in with your advisor before making any decisions.

Types of Funds

Stock mutual funds can help you grow your capital and dividend income. The types of funds you and your wealth management advisor will pursue generally depend on your investment strategy. Here are some of the possible types of funds you may want to discuss:

• Large-cap, midcap and small-cap funds
• Aggressive growth funds
• Equity-income/growth and income funds
• Sector funds
• Global, international, country and regional funds
• Specialized funds
• Index funds

How to Select 401(k) Beneficiaries

When you open a 401(k), you need to select a beneficiary — or multiple beneficiaries — who will receive your assets  when you pass away. This isn’t like choosing beneficiaries for life insurance, because beneficiaries of a 401(k) and traditional IRAs pay income tax on distributions. 

Your primary beneficiary is your first choice to receive retirement benefits. If your primary beneficiary doesn't survive you or declines the benefits, your secondary (or contingent) beneficiary would receive the benefits. And finally, if you’d like to name more than one beneficiary to share the proceeds, you can divide it up proportionately by specifying the percentage each beneficiary will receive.

Annual Contribution Limits

Your maximum retirement plan contributions change yearly and depend on your age. For 2025, the annual limit for a 401(k) plan is $23,500. IRA participants can contribute no more than $7,000.

The IRS also allows people 50 years and older to contribute “catch-up” money. In general, these individuals can contribute an additional $7,500 to their 401(k). Employees aged 60, 61, 62 or 63 have a higher catch-up contribution limit for 401(k)s of $11,250. For IRA participants, the catch-up contribution limit is an additional $1,000.

Saving Alternatives to a 401(k)

If you’ve maxed out your 401(k), and are able to contribute even more, then you shouldn’t stop saving and investing for your future. Consider one of these savings options to maximize your investments.

1. Traditional or Roth IRA

An individual can contribute to an IRA account on top of their 401(k) investments. While a traditional IRA offers an immediate tax break, a Roth IRA means tax-free withdrawals when you’re of retirement age. And here’s one benefit of an IRA vs. a 401(k): You have more investment choices, so it’s easier to control your portfolio.

2. Mutual Funds

Investing in mutual funds is a key strategy to help you diversify your portfolio. You’ll pool money with other investors to buy stocks, bonds, and short-term securities — so you own a small portion, which minimizes your risk while still letting you participate in the reward.

3. Annuities

Annuities help you accumulate funds for retirement by paying a steady stream of guaranteed income. These are financial products into which you can make a lump sum payment or multiple deposits over time that you will earn interest on. However, you pay taxes when you receive annuity income.

4. Life Insurance

Certain types of permanent life insurance policies build cash over time. This can be a great way to provide tax-free supplemental income when you retire. 

5. College Savings Plans

Certain college savings plans offer tax advantages. Education Savings Accounts (ESAs) max out at a $2,000 annual contribution and must be made before your child turns 18, unless the designated beneficiary is a special needs individual. The funds can be used for elementary, secondary and college education expenses. There are also state sponsored 529 plans, which feature higher limits which range from $235,000 to $575,00 depending on the state.

Self-Funding a 401(k)

Don’t have access to an employee-sponsored 401(k) plan? You don’t have to miss out on your retirement goals. Try investigating these options for self-funded and self-employed plans.

1. Traditional IRA

With a traditional IRA, you can save up to $7,000 in 2025 (or $14,000 including your spouse). This is a pre-tax contribution, deducted directly from your paycheck before taxes.

2. Roth IRA

Roth IRAs have the same limits as traditional IRAs. However, if you expect to retire at a higher income bracket, consider the after-tax contributions of a Roth IRA.

3. Solo 401(k)

Self-employed individuals can set up this plan, in which they act as both the employee and the employer, and save up to a maximum of $23,500 in 2025. You’re also able to invest up to 20% of your net earnings from self-employment.

4. Simplified Employee Pension (SEP) IRA

Contribute up to 25% of the W-2 income you pay yourself with this tax-deferred plan.

5. Savings Incentive Match Plan for Employees (SIMPLE) IRA Plan

The SIMPLE IRA plan allows up to $16,500 in contributions annually, and you pay taxes when you withdraw. Bonus: As an employer, you can deduct matching contributions as a business expense.

How to Roll Over a 401(k) to a New Employer

If you’ve scored a new job, congratulations! But don’t abandon your former plan sponsor too quickly: you want to be sure to take your previous employer-sponsored 401(k) plan with you. Follow these key steps to make the process a cinch. 

Find out if your new employer offers a retirement fund. As part of your onboarding process, you should learn about your new company’s benefits — including retirement funding. If it offers a 401(k) plan, great! A simple 401(k) rollover might be the easiest and smartest move. Always ask for a direct rollover so your check is sent directly to your new account.

Decide where to transfer your 401(k) rollover. If you decide not to do a one-to-one 401(k) transfer, consider rolling the funds into a Roth IRA or traditional IRA. Remember that while a traditional IRA will transfer money into a tax-deferred status, you will have to pay taxes on transfers into a Roth IRA. Annuities are another option that can provide long-term saving and investing income for life.

Find the necessary account information. You’ll need current account balances, details of the types of mutual funds in the account and account statements.

Talk to your Farm Bureau advisor. Now is a good time to reassess your financial goals. Is it time to think about saving for college or a new home? Or is retirement approaching? Farm Bureau can help you make sense of your retirement funding options and help you decide what works best for you, your family and your situation.

How to Find an Old 401(k) Plan

What if you can’t find an old 401(k) from a previous employer? You might be surprised to know you’re not alone — about 1 in 7 people have unclaimed cash or property that is currently being held by state governments and treasuries. 

If you’re looking for a 401(k) from an old job, a good place to start your search is the internet. Online resources like the National Association of Unclaimed Property Administrators can help you find unclaimed property and 401(k) accounts. Another option is to contact your former employer, which should be able to tell you where your 401(k) was managed and who to contact with your questions. 

Finally, try searching your personal files to track down an old statement, which could provide you with key details to help you track down your account. Don’t leave money on the table! 

Can You Withdraw Funds From a 401(k)?

When you’re looking to buy a new house or fund your child’s college education, withdrawing from your 401(k) might be tempting. But hold that thought — it's generally not a good idea.

First, not all 401(k) accounts allow borrowing. If yours does, there will be limits. Generally, you’re able to borrow up to $50,000 or 50% of your vested balance — whichever is less. And this isn’t “free” money; you’ll have to pay that money back incrementally through your paychecks, which is taxed income. Remember: You’re borrowing from your future self and likely significantly reducing or delaying your retirement payout. Talk to your financial advisor to explore other options.

How to Calculate the Future Value of a 401(k)

Unsure how much your 401(k) will be worth in 5, 10 or 20 years? Use our 401(k) value calculator. Simply enter in your years left working, current income, current 401(k) balance and contribution information to determine your account’s future value.

Plan for Your Future

Planning for retirement is important. Farm Bureau can help. Contact a financial advisor today to find out how you can start securing your financial future.