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What is a 401k Plan

A retirement plan sponsored by the company on behalf of its employees is referred to as a 401k plan. Usually your company will provide you with a list of mutual funds to choose where you want to invest your contributions, which can greatly increase your chances of higher profits. What makes 401k plans even more attractive is that most employers provide contribution matching.

There are certain contribution limits that are determined by the IRS. Therefore you can contribute money to your 401k plan up to these limits and decide where exactly you want to invest them. After reaching the age of 50, you are given the opportunity to increase your annual contributions by a catch-up amount.

The good news is that contributions are retrieved from your salary and only after this the remainder of your salary is liable to taxes. Although these taxes are to be paid later, they will be lower since at that time you will fall under a lower tax bracket. 

Begin Your 401k Plan

401k plans provide the best opportunity to ensure your retirement years. The first thing you should consider is your goals and risk tolerance. After this see when you can enroll in your company's 401k plan. Consult with the plan sponsor about the most appropriate investments that meet your goals and risk tolerance.

Since 401k plans contribute largely to employees' financial security during retirement, you should try to gather as much information about the specifics (matching funds, contribution limits, vesting and etc.) of your company's 401k plan. Study carefully the mutual funds that are included in the list of company's offers.

Managing Your 401k Plan

401k plans are easy to establish and manage but you should make regular revisions of your 401k plan balance in order to fix any imbalances that have occurred. Keep a close eye on the performance of your retirement plan and in case it experiences any disturbances, consult with the company's financial advisor to amend them.

Company Match

Company matching of your contributions provides you with the possibility of earning some free money. So, if your company offers you this opportunity, grab it. Maximize your contributions in order to get the best out of your employer's matching.

Matching funds provide you with a growth you will not find anywhere. By participating in the company matching you start making money thanks to it, even before your investment begins to. If your employer offers a dollar-to-dollar matching, from the moment you have put your money in a 401k plan you have already experienced a 100% growth.

It is very important that you get familiarized with the company's vesting schedule so that you will know when you are going to be fully vested. Doing so will prevent you from the mistake of leaving your job before being fully vested which will cost you losing money.

401k Money Withdrawal

You can withdraw money from your 401k plan account without incurring any penalties in the following cases:

  • You are over 59 ½ years old.
  • You have become disabled.
  • Your company has let you go and you are above the age of 55.

Under the current regulations by the age of 70 ½ you are required to withdraw money out of the 401k account. An exception is made if you are still a full time employee.

Loans against 401k Account

Most 401k plans will allow you to take loans against the money you have in your retirement account. The amount permitted is up to 50% of your savings.

Most employers give their employees up to a five-year period to repay their loan. If the latter doesn't return the money until the specified time, s/he is subject to a 10% penalty. Also, if the employee decides to leave his/her employer, s/he has to repay the money within 30 days. 10% early withdrawal penalty and income taxes are levied on every amount you fail to give back, whereas the interest goes to your account.

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