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What is a 401k Retirement Plan

When signing the contract with your employer s/he may offer you the opportunity to invest in a retirement plan, which is generally known as a 401k plan. If you agree, which you should not hesitate to do, a particular percentage of your monthly salary will be allocated for the retirement plan you have chosen. In turn, that money will be invested in either mutual funds or stocks depending on the choice of your employer.

401 (k) plans are characterized with a greater ability of control on your part compared to the conventional pensions. Nevertheless, it is up to you to decide on the amount you are willing and able to allocate and where exactly to invest the accumulated money. Generally, profit sharing plans are given as a reference of understanding 401k plans, but actually there are many subtle differences between the two.

401k Retirement Plan Level of Security

Being your retirement plan, the 401 (k) requires cautious attention regarding its performance. The supervision can be easily done by regularly referring to the annual reports that are sent to you. Other sources of monitoring are the financial magazines and newspapers. The Internet also provides detailed information on financial market performance.

You should remember that your retirement is not absolutely guaranteed in terms of high returns. It is not the employer's responsibility to ensure the success of your plan, but instead s/he plays a supervisory role. He is also obliged to appoint a plan manager, who possesses the right qualifications and expertise. Another responsibility of the employer is to provide his/her employees with no less than three investment choice from which to choose. The latter should be characterized by different risk levels so that a more balanced retirement plan is constructed. Finally, the employer should include the possibility of altering the selected investments whenever you consider necessary.

Your 401 (k) plan is not guaranteed by the federal government either. Generally, the 401 (k) plans are susceptible to the ups and downs of the market, which means that at a particular point you may win a lot, but also lose everything. Specific requirements are set by the Federal Pension and Welfare Benefits Administration, which are aimed at the provision of safer 401k plans.

Retirement Years

After you have reached your retirement years, you will basically face to alternatives depending on the age at which you have retired:

  1. Under 59 ½ - in order to withdraw the whole amount accumulated in the 401k account, you will have to pay an income tax and a penalty.
  2. Over 59 ½ - you can withdraw the whole amount and be subject to only an income tax.

If you don't want to withdraw the whole amount, you will be asked to determine a scheme for the distributions. Additionally, you will be given the opportunity to transfer your resources to an IRA, thus avoiding taxation or whatsoever penalties. If you choose not to rollover to an IRA and have more than $5,000 accumulated in the retirement account you will loose the opportunity of having more control on your investments.

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