What Is A 401k Plan?
There’s no greater financial safety net than Social Security. Regardless of it’s faults, every year it helps hundreds of thousands retired people to survive in their old age. But Social Security was never meant to be the sole source of income for retirees. That’s how the 401k plan came about. It was a way for the federal government to encourage people to save money for their retirement years by giving them certain financial incentives.
So, exactly what is 401k plan? A 401k program is a retirement investment plan available to employees of companies. The company administrates the plan but employer and employee both are allowed to add funds to the plan. The all important, and huge, reward of a 401k plan is that you are able to invest using pre-tax dollars.
That is, the money that you earmark for the 401k is placed into the plan before it is taxed. In addition, the money is able to continually earn untaxed interest on your donations until you withdraw the money - typically at retirement. And even then, only the money that you withdraw from the fund is taxed. Presumably, since you’ll be at a lower income level when you retire, the amount of money that you will be taxed will be lower as well.
Some employers entice workers to join their company by touting their generous 401k packages. In better economic times, it was not unusual for a company to match the employee’s contribution with an equal amount of their own. So if you contributed $100 to your 401k plan, they would kick in another $100, in effect giving you a 100% gain on your money even before your investments kicked in. In the current recessionary economy, however, those generous packages have become harder to come by. But even without that perk, if a 401k plan is offered by your employer, you should definitely take advantage of it. When you retire, you’ll be glad you did.
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