What Is 401k Plan and its Benefits
You may have heard of it as a retirement plan. But if you want to understand better what is 401k and the benefits that you can get then read ahead.
What is 401k? It’s available to employees who wish to save for their retirement provided their employer has a plan. 401k started in 1978, when US Congress passed the Tax Reform Act, which included this retirement savings plan for employees. 401k plan is written under Section 401 Paragraph K of the Internal Revenue Code. This is where it got its name 401k. It’s a way to encourage employees to save for their retirement using a tax deferred account.
This is one of the defined contributions plans that also include IRAs and profit sharing plans. It’s called define contribution because the employee decides on the amount that he’s willing to contribute.The amount will be automatically deducted from you pay check.
What is 401k – How it Works
When you enroll on a 401k plan, you need to choose where you will be investing your money. You often have 20 or fewer mutual funds to invest in. These are usually stock funds that focus on indexes, growth stocks, value stocks, international stocks and there is usually one money market fund. The amount that you can earn of course varies with your chosen investment options. This is also true with the risks involved. If you’re not sure which investment to choose, it’s best to consult a financial professional. An investment professional or financial planner can help you understand the advantages and disadvantages that you may get on the specific investments in your employer’s 401k plan. The amount that you save on 401k plan is sometimes matched by employers or partially match like 50 cents of every dollar. Whatever amount the employer decides to give, it’s an added amount on your savings.
What is 401k – The Limits
There is a maximum amount per year than an employee is allowed to contribute. It’s currently $16,500 per year. You can also apply for 401k loan. What is 401k loan? If you have 401k plan, you can borrow money from your account. The minimum amount that you can borrow is $1,000. The advantage of 401k loan is that it will not be included on your credit report. However, there are certain fees that need to be paid and the matched amount from your employer will be stopped while paying for the loan.
Understanding what is 401k will not only ensure a happy retirement but you will also be able to take advantage of the benefits that you can get as an employee.