What is a 401k Plan?

A 401(k) is a powerful tax advantaged retirement instrument, provided by some employers, in which the employer or employee or both, contribute money towards a fund that the employee can tap into once he or she retires.

Many citizens look forward to retirement when they can finally escape from the day to day commute and long hours and enjoy life.

Unfortunately, when retirement time comes, they discover that they have not managed to save enough funds to support themselves.

As a result, many cannot retire when they desire or they can only partially retire while they work a part time job to make up the shortfall.

A 401k plan helps to alleviate predicaments like these by giving the employee an option to enroll in a “forced retirement contribution fund” as a way to help them save money for the future.

Similar to an Individual Retirement Account or IRA, contributions to a 401k plan are made before the income is taxed, giving you the benefit of having your money compound without taxation, until you remove it from the plan.

The law allows your employer to contribute money to your plan also which makes a 401k even more attractive.

Read Also:

Advantages of a 403(b) Retirement Plan How to Protect your 401(K) in a Divorce

A employer who contributes matching dollar amounts to what the employee puts in will help the employee accumulate funds much faster than he could on his own.

A 401k plan also has restrictions on how the money can be used and what it can be used for.

Normally, you are prohibited from making withdrawals from the plan until you reach age 59 1/2 except in the case of special circumstances.

See also  Top 5 Tips to Reduce your Cost of Living in Retirement

Many employers do, however, have rules in place that allow you to borrow from the plan with additional rules indicating how it is to be repaid.

In recent years, because of financial difficulties, many families have found themselves dipping into their 401k plans to make ends meet.

This, however, should always be a last choice of funds because when you borrow against your 401k, you are putting your future retirement plans in jeopardy.

Even though a 401k plan is not meant to be the primary source of income for a retiree, if managed smartly, it can provide a major part of a retirees income.

The absolute best part is that your money and all of it’s compounded earnings grow tax-deferred. That means that more of your earned dollars are working for you to enable you to reach your income goals more quickly.

If you work for the government, a public education organization, or a non-profit organization, you may instead be offered a 403b plan, which for all intents and purposes is the same as a 401k plan.

If your company has a 401k plan and you’ve been waiting for a personal invitation, wait no longer.

Fortunately, it’s never too late to join and the sooner you have your pre-tax dollars working for you, the better off you’ll be when it comes time for your to retire.

Image: 401K plans