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Get the 101 on the 401(k) retirement plan

It’s never too early to use the tax advantages of the 401(k) plan, says Jean Chatzky. Here are the basics to get you started.

Q: I'm 22 years old and have a new job. My company offers a 401(k) plan. Unfortunately, I don't really understand what it is. How does it work? What happens to my plan if I change jobs?

A: A 401(k) is a retirement plan that you control (as opposed to a company pension or a government Social Security plan that you do not). You decide how much you want withdrawn from your paycheck every month to be invested in the mutual funds offered by your employer. Typically, your employer will match all or part your contribution. For example, if you decide to invest $250 of your own salary and your company matches that amount, $500 will go into your 401(k) account. Check with your human resources department to find out the specifics of your employer's matching program.

In addition to effectively increasing your salary through your employer's matching funds, the money contributed to your 401(k) goes in tax-free. So, if your annual salary is $35,000 a year and you contribute $3,000, the government will only tax $32,000 of your earnings. Furthermore, your 401(k) will grow tax-deferred until you retire. Basically, the 401(k) sends more of your money to your retirement instead of to the IRS.

The money in the plan is yours, and you are allowed to withdraw it at any time — although, if you withdraw the funds before the age of 59, you will have to pay taxes immediately, as well as a 10 percent penalty. However, there are ways to borrow against your 401(k) plan, if necessary.

Once you leave your current job, you can "roll over" your old 401(k) plan into your new employer's plan, or you can invest it in an Individual Retirement Account (IRA). IRAs are available at banks, brokerages, mutual fund companies, and other institutions. Rollovers don't incur any taxes or penalties.

I'm that sure at the age of 22, retirement seems far away to you, but it's good that you're already thinking about it. Although your present salary might not be very high, you should still try to invest something every month in your 401(k), even if it's only $25 or $50. There's no guarantee that your mutual funds will earn money each and every year, but you'll be amazed by how much your retirement account grows in the long run.

Jean Chatzky’s Bottom LineThis week: Contractor caveatsMore and more of us are investing in our homes. In fact, according to Harvard's Joint Center for Housing, Americans spent some $124 billion on renovations and remodeling last year. But before you upgrade your kitchen or add a sunroom, here are a few tips to help you get the job done right:

  • Know what you want: Before you sit down with a contractor, list exactly what you want your project to include. Put items you must have (your needs) at the top of your list and those that aren't necessities (your wants) below, so that you can get a base rate for the project and add on incrementally.
  • Get at least three bids: You'll never know if you're getting a good deal unless you ask several contractors what your project will cost. Be sure to ask each to bid on the same job, otherwise, you'll never get an apples-to-apples comparison. And make certain anyone you consider has the proper liability insurance.
  • Put it in writing: Once you've chosen a contractor, get all the details on paper. Include what will and won't be done (such as protecting the property around the job site). Specify materials to be used-down to the brand of paint. And settle on a start and estimated completion date. Any changes to the original contract through the course of the job should be put in writing and initialed by both parties.

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Copyright © 2004. For more information, go to her Web site, .