A 401(k) plan is a well-known retirement savings plan that is supported by many employers across the United States. It lets employees save and invest for their retirement on a tax-deferred basis.
401(k) plans are one of the most popular ways to save for retirement. Once an employee signs up for this program, they can allocate a certain amount to be deposited in an investment account. Their employer will also add a similar amount to the account. More than 60 million Americans have 401(k) accounts, holding more than $7 trillion in assets.
How a 401(k) Plan Works
With a 401(k) plan, employees can choose to have a portion of their paycheck withheld and deposited into their accounts. Since the employers are also adding to the account, the amount is usually decided between the employer and the employee.
The employee can choose the type of investment they want to make with the amount they have. Usually, they prefer mutual funds, but there are several other options. They can choose to have their money invested in a mix of stocks, bonds, and cash. Or they can choose a target-date fund, which is a fund that automatically rebalances itself as the employee gets closer to retirement age.
Benefits of 401(k) Plan
As per Bill Schantz of Mid Atlantic Financial LLC, 401(k) plans offer many benefits, the most prominent being that they help employees save for retirement. But there are other benefits as well, such as:
- Employer matching contributions: Many employers will match their employees’ contributions to their 401(k) plan. This is a great way to boost your savings.
- Tax breaks: All Contributions to the 401(k) plan hold tax-deferred status, which means you don’t have to pay taxes on them until you take out the money in retirement. This can result in significant tax savings.
- Investment options: With a 401(k) plan, you have a wide range of investment options, including stocks, bonds, mutual funds, and target-date funds.
- Flexibility: You can usually take out a loan from your 401(k) plan if you need the money for an emergency. And if you leave your job, you can roll over your 401(k) into an IRA or another employer’s retirement plan.
Traditional vs. Roth 401(k) Plans
Bill Schantz explains that there are two types of 401(k) plans: traditional and Roth. With a traditional 401(k) plan, you make contributions with pre-tax dollars. This means there is no tax on the money until it is withdrawn.
A Roth 401(k) plan allows you to make contributions with after-tax dollars. This means you have paid taxes on the money, so you don’t have to pay taxes again when you withdraw it in retirement.
When Can You Withdraw The Money?
You can start to withdraw money from the 401(k) plan when you reach the age of 59 years and 6 months. However, if you withdraw money before that age, you will generally have to pay a 10% early withdrawal penalty.
As per Bill Schantz, there are some circumstances under which you can withdraw money without paying the penalty. For example, if you become disabled or need the money to cover certain medical expenses.
If you leave your job (for any reason), you can usually roll over your 401(k) into an IRA or another employer’s retirement plan.
Final Thoughts
Bill Schantz believes a 401(k) plan is a great way to save for retirement. Employees can choose how they want their money invested, and there are many benefits to using this type of plan, such as employer matching contributions, tax breaks, and investment options.
You can usually start withdrawing money from your account at age 59 1/2, although there are some circumstances under which you can withdraw the money without paying the penalty. If you leave your job, you can usually roll over your 401(k) into another retirement plan.
401(k) is a great way to save, but as with any investment, risks are involved. Employees should carefully consider their options before investing and understand the rules and regulations governing 401(k) plans.