Named after section 401k of the Internal Revenue Code, the 401k is a retirement benefit plan that is designed to enable workers to save and invest their earnings. The 401k retirement savings plan is normally initiated by the employer to the employee.
The employee saves a certain amount from their salary before taxes are deducted from the gross pay. This however is not standard, it depends on the 401k policy terms offered in the retirement savings plan. In most 401k retirement savings plans, the taxes are not deducted until the full amount is withdrawn from the employee’s account.
The 401k retirement savings plan became known in the 1980’s. Most employers opted to use it as a reinforcement of the pensions plan used then. The 401k was preferred by most companies because the cost of the regular pension plan had risen significantly. Most pension plans were controlled by employers. They were only issued to employees once they had reached the retirement age.
With the introduction of the 401k retirement savings plan, most employees began to opt for it over the normal pension plan that most companies initially offered.
Benefits of a 401k retirement savings plan.
1. Control over investment.
The 401k retirement savings plan offered employees freedom to be able to decide on how their funds should be invested. Most plans enabled the employees to choose whether to invest in stocks, bonds or suitable money market investments.
2. Acted as insurance against employees for employers.
The nature of most 401k retirement savings plans required that the employee must work for the company in question before gaining access to the funds. This is a restriction, but a guard against the employee leaving early before retirement hence proving beneficial to most companies.
3. Control your savings.
The plan is advantageous to employees as it enables them to control the amount of money they can comfortably contribute. This does not strain the income of the employee as saving for retirement is made much easier.
4. Tax payment is postponed.
The payment of tax is made upon the withdrawal of the whole amount saved. The tax deduction is deferred as the 401k contribution is made before your paycheck is taxed.
5. Automatic deduction.
According to most companies, the 401k contributions are done automatically before the paycheck is given to the employee. This is usually accompanied by official statements or reports regarding the same from the investment company.
6. Supplements your Social Security.
The 401k will not affect your Social Security funds in any way. The contributions will only top up the amount of money that you will receive from your Social Security funds. The 401k is only an additional income, hence very beneficial upon retirement.
7. Loan advancements.
With a 401k plan, you can be able to borrow against the funds in case of an emergency. The amount in your 401k plan is your own hence loan advancement is possible if the particular investment company is okay with it.
In a nutshell, 401k retirement savings plans could be very useful once you reach the retirement age. In case you haven’t any yet, it is recommended you approach a reputable financial advisor to enable you make an informed decision for your financial aims.
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