A Brief Overview of The 401k Plan

Many Organizations offer retirement plans to their employees. These plans include the 401k which many people may not be aware of. So what Exactly is a 401k? It is a qualified retirement plan organized by an employer. The plan lets you save pre-tax dollars that grow tax-deferred until retirement. Employers often will match your contributions, which is an offer of free money that also grows tax-deferred until you achieve the age of retirement and begin withdrawing the money.

The plan sponsor is responsible for running the plan following law, rules, and regulations, and provisions of the plan itself. It includes eligibility, contribution plan, how much the employer will contribute, available investment options, reallocation of your investment assets, hiring vendors to manage the plan, and features of the plan.

The employee is responsible for deciding how much they want to contribute when it is pay period. The payments are deducted from your paycheck on a pre-tax basis. By paying to a 401k, you lower the amount you remit in current income taxes. You do not have any income taxes on the contributions you have till start withdrawing from the plan.

What you should know about 401k plans.

Don’t postpone your participation in 401k, even though you assume you can’t afford to. Your best guarantee is time and you are assured that you will achieve your retirement goals, so the earlier you begin, making contributions, the safer it is and you will be better in retirement. Even a small contribution goes a long way.

The 401k is not an account for saving but a retirement plan. The money in the 401k cannot be accessed even in an emergency. There are plans that permit hardship withdrawals and loan but the rules are prohibitive.

Ensure that you understand your plan and how to take full advantage of it. Attend all educational opportunities that your employer offers. Go through all the information your organization gives regarding the plan. Research online and find a few sites on 401k plans. They have valuable information regarding the plan. Understand available investment options and ask questions whenever possible.

Since most employers do not provide traditional pensions and you cannot rely on Social Security to be quite helpful by the time of retirement, it is critical that you begin making contributions to a 401k. An early start enables you to accumulate enough money to support you when you cannot work and are older. Because of the impact of compounded interest a small investment in your twenties will be huge in your fifties. It is therefore wise to start early.