Understanding 401(k) Plans
Your employer may offer you a 401(k) plan and you
may not take advantage of it because you don't know what it is or how it benefits
you. You should understand exactly how a 401(k) plans work and why you
should start contributing to one. These are great savings accounts that
allow for consumers to lower their taxable income and begin saving money without
making deposits. Since the late 1970's the government has been encouraging
people to take part in their employer's 401(k) programs, with the first true
programs being offered in 1982. Basically the accounts are contributed
to by the employer as well as the employee and it earns interest accordingly, with
most people using this type of account for their retirement savings.
There
are some unique benefits
to choosing to utilize 401(k) plans. To make the most of it, you should
learn a little bit more about what makes these accounts different than some
of the other savings options that are out there today. The first thing that
you should know is that the IRS limits annual contributions to your 401(k)
to $11,000 a year, that being said, this is a substantial amount of money to put
into a retirement fund each year.
These plans are really
nice because the money is taken out before taxes. What this means is
that you never even "see" the money being taken so you don't feel like you have
a part of your paycheck taken from you, while you actually have had it taken out
and put into the account! These plans are also nice because many employers
will match the amount that the employee puts into the account, so you can
build your 401(k) faster than you would have ever imagined.
Many people don't see the beauty of saving in a 401(k), but if you started
saving when you were 25 you could have more than one million dollars saved by
the time you retire. If you decide to withdrawal the funds before you are
59 than you will have to pay a fee to the IRS of 10% of the amount that you are
withdrawing from the account. This may seem like a negative aspect of the
account, but it will actually keep you from spending the money.
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