The Basics Of Insurance, Taxes, And 401(k)s For First-Time Employees

If you’re entering the work force for the first time (although this probably pertains to lots of older employees too), all the details of insurance, taxes, and 401(k)s can be daunting/boring/confusing. Ron Lieber at the New York Times has pared away the extraneous bits and created a “primer for young people starting their first job,” including helpful advice like why it’s important to get health insurance, how to fill out your W-4, and why it’s good to take advantage of the built-in “raise” that comes from a company-matching 401(k). Sure, this is all basic stuff, but that’s the point. Ya gotta start somewhere.

“A Primer for Young People Starting Their First Job” [New York Times]
(Photo: webg33k)

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  1. I like that article. Obviously, there are lots of recent grads entering the workforce this time of year, and this type of information is not often mentioned elsewhere.

  2. pegr says:

    Always deduct the amount required to maximize your employer’s 401(k) match. Yes, I’d wait in line for free money.

  3. When I teach Business Ethics, I devote an entire day to this. The first time I taught it it was a shock to my syllabus to when we got to investment ethics issues and I ended up spending a class and a half explaining the basics of investment and 401(k)s and mutuals funds to my students. Now I put an extra day in there on purpose because that’s probably the most useful thing I teach all semester, even if it’s not TECHNICALLY on the curriculum for the class. Most of my students don’t even know how mutual funds WORK. It’s such a relief to them to have the basics explained; once they get the basics, they can grasp the more complex stuff pretty quickly. But if you (like many of my students) come from a blue-collar, pensioned background and you’re the first in your family to college and/or to defined contribution retirement planning, a lot of this stuff is a mystery to you.

    (And, yes, in my state there’s mandatory high school consumer education. I expect it’s just not important to them at that point in their lives, so they don’t care. When I get them, most are a semester away from graduating and interviewing for jobs and getting offers with benefits packages.)

  4. @Eyebrows McGee: When I teach Business Ethics, I devote an entire day to this.

    I applaud this.

  5. henrygates says:

    Keep in mind there is often a schedule of when that match becomes yours. If you quit after 2 years, for example, you may only receive a small percentage of what they list as matching contributions.

  6. sir_eccles says:

    Talk about “bombarding people with too much investment information”. I just got an info pack for my 401(k) and despite reading through the summary sheet still can’t actually work out if my employer makes a contribution that I definitely keep or not. That’s without trying to work out which of the dozen or so funds I ought to use.

  7. KevinMoneyAisle says:

    Some employers are having people from the 401k program come into the workplace to give new employees a kind of “investing 101″ primer in order to combat some of this. I hope this practice increases.

  8. Mike8813 says:

    @sir_eccles: A common company contribution is to match 50% of your investment up to a certain percent of your salary. In most of my experiences this is 6% (again, referred to as a “match”). So as an example, you can deduct 6% of your paycheck, and your company will throw in an additional 3%, totaling 9% of your paycheck. It’s really a great deal. Any percentage you go over 6% however, you’re on your own. There would be no additional company contribution past 3%. These are all examples based upon what I’ve seen to be common, but definitely find out specifically what’s offered for you.

    As for what you would “definitely keep”, the company’s contributions are only yours to keep after a certain period of time. This is called a “vesting schedule”. Ask about it, and you will see that the longer you stay in the plan, the larger percentage of their contribution will be yours to keep, or “vested”. If you leave early, you probably will forfeit their contributions and will only have what you’ve put in. (+ or – market investment results and minus whatever penalties they impose on early withdrawal.)

    Sorry for rambling, but hopefully I’ve been SOMEWHAT helpful. Just make sure to find out how much they will contribute (percentage of YOUR contributions), how far they will go (up to what percentage of your paycheck will they “match” your contribution?), and what is their “vesting schedule”? Good luck, friend!

  9. Haltingpoint says:

    Beware certain types of “401k-like” programs. My girlfriend just started a job with a university (which is a non-profit) and while she doesn’t have a 401k, she does have a similar investment program.

    The kicker though is the vesting schedule…if she isn’t there X amount of years, she loses all of HER contributions to it as well. I’ve asked her to bring me home the contract for that as that doesn’t seem right at all but that scares the shit out of me.

  10. @Haltingpoint: The kicker though is the vesting schedule…if she isn’t there X amount of years, she loses all of HER contributions to it as well. I’ve asked her to bring me home the contract for that as that doesn’t seem right at all but that scares the shit out of me.

    To my knowledge, that’s illegal. The employer cannot take any funds that the employee has contributed; but can take some or all of the funds it contributed if they were not fully vested.

  11. mtaylor924 says:

    @Haltingpoint: I also work for a university – typically the retirement plans for universities, government work, and other non-profit are referred to as 403b. Basically that’s just a different section of the law that refers to retirement plans for non-profit, but they function essentially the same as a 401k.

    And heavylee-again is correct AFAIK – the employer can’t keep funds that the employee contributed – those funds would remain in the account and continue to increase/decrease in value (depending on market conditions) until rolled into another 403b or 401k, cashed out (with requisite tax penalties), or disbursed at retirement age.

    On the off-chance that they employer can keep her contributions, and she thinks there is a chance she would not stay there until fully vested, she might be better off NOT making the 403b contributions and instead opening her own IRA or Roth IRA to make contributions to on her own. If/when she reaches full vestment, she could start contributing to the 403b in order to get the university’s match. Of course, this scenario has her losing x years of the match, so again only recommended if she thinks there is a good chance of not staying there for a long time.

  12. lordargent says:

    Here’s my short and sweet version of this life lesson.

    Insurance: Get some, because people without insurance get ripped off.

    For example, I recently had some dental work done and my dentists office shows a full disclosure of fees, including what a procedure would cost a person that had no insurance. That number (~$6000) was about double what my insurance company paid (~$2500) + what I paid payment (~$500) (my insurance covers 80%, but the insurance company itself is getting 50% off the non-insured cost of the procedure).

    Taxes: The government takes 1/4rd, maybe 1/3rd, in rare occasions, almost 1/2.

    401(k)s: put some dough into it, because social security will probably suck by the time you’re old enough to collect it.

  13. sir_eccles says:

    @Mike8813: Oh yes, I pretty much understand all of what you said. The problem comes when trying to read the summary sheet and trying to understand it. I got so confused with al lthe terms, did “defer” mean I keep it or I leave it there for a bit. They need something like they have with credit cards, a little box that gives plain english bullet points. e.g.

    Employer contribution – X %
    Vesting schedule – you keep Y% at 1 year, Z% at 2 years etc

  14. digitalgimpus says:

    @pegr: It often doesn’t make sense to use a 401(k). For example:

    - The interest on debts such as credit card or student loan may be much higher than anything you get in a 401(k). So spending $2 to make $1 will never increase your worth. Only digs a deeper hole.

    - You normally don’t get those funds until they vest, which can be 1-5 years. If it’s your first job, there’s a good chance you only plan to be there a year. You won’t collect the employer contribution anyway. The market sucks right now so most 401(k)’s are loosing cash in the short term. Again, likely have other debts it would make sense to pay off.

    Besides, someone entering the workforce today likely won’t retire until their mid 70’s considering the retirement age will without question increase a few times. That’s also the average life expectancy. Odds are you’ll never touch the money. That’s just the reality.

    That’s why some suggest you not put too much into retirement… may end up just wasting opportunity until your dead.

  15. K-Bo says:

    @digitalgimpus: Part of the reason that retirement age is going up is because life expectancy is going up. They aren’t going up at the same rate, but planning to work until the day you die is dangerous unless you are willing to take the risk you might be working well into your 80’s. Also, you act like there is nothing you can do about retirement age. You don’t have to reach the magical age everyone else is retiring to retire. You retire when you get enough money to retire. If you want to work till you are in your 70’s then die have fun, I’m saving to retire at 60 and travel. And if I die unexpectedly young, I will leave the money to a good cause (whether that be family or charity), and not feel that I wasted it at all.

  16. Tiber says:

    I wonder why this type of information is being ignored. My high school had an (I think mandatory) economics class, but I never learned anything at all in high school about how to do taxes. I never learned anything about it going for my degree either, but I went to a trade school.

    So here I am 6 months into my first job (aside from family work) and figuring out everything as I go along. I would think that high school would teach this sort of thing, but apparently dead poets are more important. I applaud this article and Eyebrows McGee.

  17. ffmariners says:

    I am trying to decide what to do now. My new employer matches 50 cents on the dollar up to 4%. So I contribute 4%, they contribute 2%.

    I would be fully vested after 3 years.

    But I do not know if I should do the full 4%, or do an IRA of some sort, or some other form of investment.

    By all means I can afford to save almost 50% of my paychecks (after taxes)…. I just have no idea what to do with the money and I feel putting it all in the savings account is not letting it grow as it should.

    Anyone have good links or suggestions?

  18. dodongo says:

    re: @digitalgimpus: Agreed, totally, that you certainly don’t want to over-invest in retirement-related crap. However, your employer is offering to give you a massive bonus as the matched contribution begin vesting, so don’t discount the extra $$ you could have stocked away. I could see not being wild about throwing money into the 401(k) beyond the matching threshold if $$ is tight or vestment is unattainably far off.

    That said, you’re exactly right, the market is down right now… so you WANT to throw your money in if you can afford to, and if you’re young then you’re really in a prime position to capitalize, since you’re not going to think about touching that money for decades to come.

  19. Amnesiac85 says:

    Great article. I just started my new job about a month ago and have my 401k meeting this week, so it’s all good advice. Awesome.

  20. @digitalgimpus: It often doesn’t make sense to use a 401(k). For example:

    - The interest on debts such as credit card or student loan may be much higher than anything you get in a 401(k). So spending $2 to make $1 will never increase your worth. Only digs a deeper hole.

    - You normally don’t get those funds until they vest, which can be 1-5 years. If it’s your first job, there’s a good chance you only plan to be there a year. You won’t collect the employer contribution anyway. The market sucks right now so most 401(k)’s are loosing cash in the short term. Again, likely have other debts it would make sense to pay off.

    Besides, someone entering the workforce today likely won’t retire until their mid 70’s considering the retirement age will without question increase a few times. That’s also the average life expectancy. Odds are you’ll never touch the money. That’s just the reality.

    That’s why some suggest you not put too much into retirement… may end up just wasting opportunity until your dead.

    I hope you’re kidding, but I’ll presume you are not:

    That’s the lamest, most short-sighted advice I’ve seen in a long time. It totally disregards the single factor that makes most kinds of investing a hugely powerful tool over a long term: compound interest.

    Additionally, when the market is down is the BEST time to be buying. Obviously, things don’t turn around quickly and one doesn’t become wealthy overnight; but now is a great time to get in. Ever heard the adage, ‘Buy low, sell high’?

    401(k)s and 403(b)s can be used wisely for other things than just retirement. For example, loans can be taken from it to buy a first home. Again, with housing prices low now, someone who already had some funds built up may see that as a viable option. Further, a person who starts investing early and steadily is EXACTLY the typical person who may end up being able to retire earlier than most people. So I think it’s silly that you’d think that money invested is likely to not be touched.

  21. crapple says:

    @ffmariners: I went through the same thing 4 months ago that you are right now.

    It all comes down to the fact that you can’t find an IRA that’s going to offer an interest rate of 50% (what your employer is “paying” by matching). Max out your 401K contributions and see how it goes. If after a pre-set amount of time (6-12 months would be good to see how much extra money you have in the long-term) you want to invest more than your 4%, then look at an IRA or other savings means.

  22. @ffmariners: Take the full 4% to get the total match; that’s free money.

    Max out a Roth IRA every year ($2000, I think?) for the tax benefits.

    After that, do some research and deciding. If you’re with a credit union (and some banks), they often offer free investment planning. (If you see an investment planner, which is not a bad idea, see someone who’s “fee only” not commissioned based on your investments.)

    If I were you, I would:
    1) Read a few books from the library on the basics of investing, and take a class at the local CC if one’s offered (often weeklong seminars, etc.)
    2) Talk to someone you know who’s savvy about money and ask them to teach you. Most people are happy to share and happy to help you get your feet under you.

    –In both cases, avoid people/books who are totally focused on JUST ONE THING in investing; you’re trying to get some broad-based knowledge.

    Personally, after that, what I do is build my savings/checking padding to where I’m comfortable for monthly expenses. Then extra goes into a high-yield money market account, where it gets better returns but is accessible. That’s where I’m building up my “emergency account”; I’m aiming for $10,000, but that’s as much a psychological number as anything else. After THAT (and very shortly, yay!), I’m going to Fidelity to invest in mutual funds (primarily index funds) through them; it’s still pretty liquid but you can get much higher rates. That’s as far as my current plan goes. :D

    We’re also considering alternate kinds of investment, like buying a rental property, but that is riskier and, for us, requires a lot more education before we’re ready to jump. We’ll only do that once we’re secure that we’re in a good place with the more traditional investments.

  23. @ffmariners: Also, talk to friends. You can get the best recs for planners, etc., by talking to friends, and you can just learn a lot about different investment strategies. In my little cultural niche, most people are willing to talk about their strategies, if not the specific dollar amounts. I consider myself pretty financially educated (I remember my dad teaching me to read stock tables when I was SIX, interned at a bank, etc.), but talking to friends and neighbors has been really helpful for me. Especially the ones who are a life-stage or two ahead of me, since I hadn’t really thought about how to change my financial plan when I have children, so talking to friends with children really gave me a lot of valuable information to index in my brain. :) I might not do things the same way, but now I have a dozen examples of HOW people do things, what works, what doesn’t, etc.

  24. ffmariners says:

    @crapple: I guess my issue is with the 3 year vestment… I do not know if I will be there in 3 years.

    Would it be wise to wait a year or two before I start 401k contributions is what I am mainly thinking.

    Also, do you know what the -average- growth (interest rate) is?

  25. ffmariners says:

    @Eyebrows McGee: Good advice all around.

    Yeah I intend to put like 1 months worth of living expenses in my Bank of America Savings, a years worth of living expenses in my AmTrust Direct Money Market Checking account, and spending cash in the Bank of America Checking account.

    It won’t take too long to get all that done, though. I am pretty frugal and minimalist so I will be netting a lot each month to put towards these accounts.

    I can do the 4% for the purposes of a match and just hope I stay there 3 years, and I will look into the pros/cons of a Roth IRA… I didn’t know about the 2000 max contribution.

    Thanks for the info!

  26. noodleman says:

    … spending $2 to make $1 will never increase your worth. Only digs a deeper hole.

    But that’s not how a 401(k) works. You’re spending $2 to make THREE dollars if an employer matches 50% of an employee’s contribution. Sounds like a pretty good investment to me for doing nothing more than socking away a few tax-deferred bucks each paycheck. (50% per year! Guaranteed!).

    I was fortunate that become vested immediately in one company’s 401(k) so have enjoyed their 50% match for eight years. It has definitely had a very positive impact on my bottom-line. The compounding effect to my account is wonderful.

    However, there is one caveat to watch out for: some company’s match is given in company stock. Unless you are absolutely confident that the company stock will increase in value (and, unfortunately, not all do), it would be wise to determine if you can move the company’s contribution into one of the other mutual fund opportunities a 401(k) plan offers. Fortunately, my company does allow that … and I have been judiciously converting their equity contributions into better mutual fund investments.

  27. @ffmariners: Do you partially vest before then?

  28. ffmariners says:

    @Eyebrows McGee: Honestly, not sure! I should re-look through my benefits package.