401k, put-simply
What is 401k? |
A 401K is a retirement plan sponsored by one’s employer
or business. It allows for easier, tax-deferred savings during the time
that one is employed. When setting up a 401K, employees agree to have a
portion of their paycheck sent directly to an account with no taxes
removed. This type of retirement plan differs from the common pension
plan because the investment is voluntary, and the benefits are based on
the contributions one makes to his or her account. Through a 401K, one
can also choose to invest in stocks and bonds. Many companies may also
match a percentage of what an employee invests in his or her 401K,
meaning that the employee will earn money by investing in his or her
401K. This serves as an incentive for employees to save more money for
retirement. One can begin to withdraw money from their account around
the age of 60, depending on his or her plan. Any money taken out or
distributed before that time is subject to a penalty.
How do you save money using your 401K?
There are numerous ways that one can save money through a 401K
investment plan. First, the money invested in one’s 401K is invested
before taxes are removed, because they are tax deferred. In other words,
the money you place into the account accumulates interest without being
lowered by taxes. Yet, once the investor reaches a certain age and
begins to withdraw from his or her account, the money accumulated will
begin to be taxed. This benefits the investor by allowing his
investments to grow unhindered until a later date. The withdrawal of the
money from one’s paycheck also allows him to have a lower take-home
salary, consequently lowering the percentage of taxes taken out of his
paycheck. In addition to this one may earn money depending on his or her
company’s plan. Many companies may offer a match to the employee
investment, resulting in the gaining of money for employee investors.
This serves as both an incentive for the employee to save more money and
for the employee to stay with the company for years to come.
If I leave my job can I keep my 401K?
Many times one is able to keep his 401K when leaving a job, but it
primarily depends on the situation. When an employee leaves a job, the
account typically stays active, allowing the investor to draw out money
at the age of 70. Some companies may charge a fee to the accounts of
employees who have left their job but maintained their 401K through
their ex-company. Yet, if an employee begins a new job that also has a
401K plan, his or her account can be rolled over and continued by his or
her new employer or company. These are known as 401K rollovers. In other
cases, a 401k rollover to IRA may occur.
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