A 401K is a very important type of investment tool that was started by some legislation called ERISA in the 1970s. While it can hold a variety of different asset classes, the unique tax status of a 401K can make it very beneficial for a worker who invests through it. If an employee's income drops as they get older, not having to take taxable distributions down the road can lead to a hefty tax savings. However, the information we just covered is the what, retirement is the why, and the following is a solid chunk of the how.

Getting Started

Most companies in this day and age offer some kind of 401K. While some companies match what a worker contributes, most do not anymore. To sign up for a 401K, see your human resources department and ask them for the specific details of your company. They will know what to do, and in fact you may already be enrolled. The first step in funding and growing your 401K and its resident nest egg is to make sure the groundwork is in place. Once the account is set up, funding your account is a fairly easy matter that can be done in short order.

Funding

Go to work and get paid. You have two major options for putting money into your 401K. You can either deposit it manually or you can have an amount or percentage of your paycheck automatically directed into the account. Both methods have their advantages and disadvantages. For instance, the best part of manually funding your account is that you can put in more money when you have more money, and keep what you need to during difficult financial times. The bad part of doing it this way, however, is that it takes thought and effort to deposit money. Most people forget or choose not to when something unusual happens.

Automatic funding, on the other hand, is a whole different animal. While you can automatically fund your account easily, many people never even think of doing this. All you have to do is direct a certain dollar value or percentage of your paycheck into your 401K. The rules vary, but for many workers the most you can deposit is $17,000 per year or 17% of your pay, whichever is greater, into your 401K.

Investing

Just putting money into your 401K is only half winning the battle. To get the maximum rewards, you need to invest. Here, you need to review different stocks, bonds or mutual funds you might want to invest in. The process can be maddeningly difficult, or you can simply put your money into a target date fund and forget about it until the date draws near. Over time, your money should grow faster than inflation, giving you a nice nest egg down the line.