What is a 401k Plan?

So, what is a 401k plan? We have all heard about it before, but few of us actually completely understand what it is. Basically a 401k is a way to help employees save for retirement.

When you open up a 401k account a percentage of your paycheck is automatically taken out before it can be taxed and put into a 401k plan, where it will be invested. Your employer may also match your deposit either 1 for 1 or .50 for 1 or whatever that employer decides.

For example if your employer matches you $ .50 for every $1 you deposit and you deposit $1,000 your employer will deposit an extra $500. This “free money” makes the plan nearly irresistible.

But remember not all employers will match your deposit so make sure you figure out your employer’s retirement plan before assuming anything.

Maximum Deposit

401k plans also have a yearly maximum deposit, which change every year due to inflation. You may also be limited on how much you can deposit by your employer’s specific plan.

For instance if you are making $30,000 a year and your employer only allows you to deposit 10% of your paycheck you can only deposit $3,000 a year despite any what the U.S. tax code says you can contribute.

If I leave the Company?

If you leave the company your 401k plan will continue to stay intact, however some employers do charge you fees to maintain your account.

Once you switch to a new employer your 401k account may also be switched to your new employer.

Withdrawing

When you withdraw money from your 401k you have to pay the taxes on all money that you are withdrawing. Remember you don’t pay taxes on the money that is deposited so you must pay them when it is withdrawn.

In addition if you are under the age 59 ½ you will also have to pay a 10% penalty on your money as part of an early withdrawal fee. After all, the plan is built for retirement so using it early goes against the whole idea.

For more information on 401k plans return from what is a 401k plan to 401k information.