Advantages Of Contributing To A 401k Plan
A 401k plan is a tax-deferred savings plan set for retirement that is set up by mid to large sized corporations to help employees save for retirement. These plans are often a combination of contributions from both the employer and the employees, with each paying a percentage of the employee’s paycheck towards the plan (although there is no legal obligation for an employer to contribute). The name 401 stems from the name of the IRS code, section 401, paragraph K. Needless to say, the best investing advice you could ever receive is to begin contributing as much and as early as possible.
How It Works
An employer will generally wait for an employee to work consistently for a period of 3-6 months. After such a probationary period, the company will ask the employee to join the company sponsored retirement plan. An employee would then be allowed to contribute a percentage of money from their monthly gross pay before taxes are taken out. Your employer will also agree to match your contribution by a certain percentage, usually 5-10%. Both contributions are then sent to the plan administrator who will invest the money in stocks, mutual funds, bonds, and other investments. Employees get to decide where they want their money invested, using a list available that outlines the risks levels on each type of investment. The money can continue to be contributed through your working years and even rolled over into a new job. Funds are available at retirement age of 59 1//2. Monies taken out before that will be charged a 10% early withdrawal penalty and any tax payable on the total amount withdrawn.
Why Contribute
There are definite advantages to saving money for retirement and a 401k can be beneficial to those who are working up to retirement. Here are some of the benefits of contributing to a 401k account:
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Any contributions made are tax-free from both State and Federal taxes.
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Employee contributions are free money not to be refused.
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Qualified plan administrators will invest money strategically to earn you even more retirement funds.
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Capital gains made on 401k investments are tax-deferred.
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Money held in a 401k account can be borrowed against for emergency situations and hardships.
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When you leave your job, you can always rollover your 401k to a Roth IRA.
If you are not currently enrolled in a 401k plan through your employer, speak with a human resource or payroll representative to see if you are eligible for the plan. If you have recently changed jobs, speak with a company representative to learn how to roll your existing 401k funds into a new account and continue your contributions towards retirement.
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