Incepted in 1978, the 401k plan has quickly become of the most popular employer-sponsored retirement plans in the United States. Contributions made by workers and employers have helped millions of retirees retain security throughout their golden years. Learn more about the 401k retirement plan, how it works, its benefits, and other retirement options available.
How the 401k Plan Works
The 401k plan is a retirement plan that permits eligible employees to save money for their own retirement on a tax-deferred basis. Only qualified employers are allowed to sponsor 401ks for employees. When you complete the paperwork for your 401k, you will be asked how much you want to deduct from your paycheck each pay period and the amount you choose will be deposited into your account. Your employer may also choose to make contributions into your account on your behalf. Many employers will match contributions dollar-for-dollar, while others will match a percentage of a worker’s contributions. Some employers do not make any 401k contributions for employees.
It is the responsibility of the employer to run the plan in accordance with the rules, regulations, provisions, and laws that govern the plan. This means determining who is eligible for a 401k, how much they can contribute, how much the employer will contribute, and what investment options are available. It is also the responsibility of the employer to hire the necessary vendors to run the plan, and decide which features will be available to workers. It is the responsibility of the employee to decide whether or not they would like to participate in the 401k plan and how much they want to contribute each pay period.
Remember that a 401k is a retirement plan, not a savings account. Contributions placed in a 401k are not easy to access in an emergency. While some 401k plans allow you to withdraw your funds early in the event of a hardship, the rules that govern these loans are restrictive. After choosing a 401k plan, your employer is required to provide you with a summary plan description. Take the time to read this description as it contains a lot of good information on how your plan works, what features are available, who the trustees are, and similar information.
Benefits of a 401k Plan
When it comes to retirement savings, most people realize that 401ks have big advantages over traditional IRAs. From tax advantages to tax credits and deductions for your business, starting a 401k is a smart way to save more over time. In 2018, you can contribute up to $18,500 into a 401k plan if you are less than 50 years old. If you are 50 years old or older, you can contribute up to $24,500. One of the biggest advantages of a 401k is the employer match. All contributions from an employer are free money that quickly adds up in your 401k account.
Another major benefit of 401k plan is the deferred tax payments. Any money that goes into a 401k plan is taken from an employee’s paycheck before taxes are taken out. This allows employees to take home a larger paycheck by decreasing the amount of taxes paid. It is also important to know that any money put into a 401k can accumulate for years. With a traditional 401k, withdrawals are taxed when the money is taken out during retirement.
Other Retirement Account Options
While the 401k plan is one of the most popular options for retirement, it is not the only one. Traditional and Roth IRAs are a popular alternative to 401ks. With a traditional IRA, tax benefits are offered now rather than later. This means any contributions you make are tax deductible. With a Roth IRA, tax benefits come later. While your contributions are not tax deductible, withdrawals at retirement are free from tax if they are qualified distribution. For a distribution to be qualified, the Roth IRA must be 5 years old and you must have attained the age of 59 ½. If you are looking for an alternative or to supplement your existing 401k, there are other options available. Brokerage accounts and annuities are also viable options.
Contact a Financial Consultant
Most employers will automatically take money from your paycheck on a regular basis to put into your 401k account, and many will also match the amount that you contribute. If you are self-employed, you can also establish an individual 401k plan for yourself. If you choose to change jobs, you can also roll over the funds in your account.