If you’ve ever worked for any company chances are you’ve contrived money into a 401K retirement plan, but did you really take a good hard look at the details of the plan?
A 401K is the typical retirement plan offered to employees by most companies and is funded by employee contributions that are deducted from your paycheck. If you are lucky, the company may match all or part of your contribution into the plan but nowadays, most companies don’t offer this benefit.
One of the big pluses of this type of retirement plan is that the money is deducted from your paycheck on a pre tax basis, this allows the money to accumulate tax free in the retirement account and also reduces you’re the amount of taxes you pay on each paycheck.
Many people think that a 401K plan is only for large companies but this type of plan can be created by almost any business or tax exempt organization. So even if your company only has a handful of employees, if your company qualifies, you can have this type of plan for both yourself and your employees.
While the weekly deductions may make it seem like you are only contributing a small amount to your 401K retirement plan, when this amount gets compounded over 20 or 30 years it can really add up! IF your company matches funds all the better as this is free money to add to your nest egg. Be aware, however that if the company does match funds there is usually some sort of vesting period so if you leave the company after a short time of employment you may not be able to take the amount matched with you, however you will be able to roll over any of your contributions into the new companies 401K without penalty.
The 401K is considered a personal investment plan and enjoys the protection of pension laws. This means that your 401K contributions are protected against garnishment from people you owe money to. There is one exception, however, and that is child support.
The 401K plan has many advantages but it does have a couple of disadvantages as well. One disadvantage is that it is not easy to withdraw money prior to age 59 ½. There is a large penalty unless it is for education or emergency. Another disadvantage is that they are not insured by the Pension Benefit Guaranty Corp.
Usually the employee is allowed to choose from a variety of mutual funds in which they can invest the contributions they make to their 401K plan. Typically you may choose from a low risk, medium risk or high risk and allocate a certain percentage to one or all of these funds. Typical investments in a plan include money market funds, bonds, stocks and treasuries. You are allowed to change your investment percentages and deductions at certain times of the year.
The 401K retirement plan is watched over by the government and, in fact, is named for the section of the Internal Revenue Code of 1978 where it is stated and is administered by the Employee Benefits Security Administration - a division of the Department of Labor. That being said, companies have full control over the funds and the investor has many choices on how to invest his retirement savings. It’s a good idea to take full advantage of this plan in order to accrue the most amount of money for your golden years.
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