A 401k savings plan, often referred to as only 401k, represents a retirement savings plan that is provided to an employee by their employers. Basically, this plan allows the employees to save and then invest a small part of their paycheck before the government owned taxes are deducted from it. With the 401k plan, the same taxes are paid only when the funds saved are withdrawn from the savings account.
Where Did 401k’s Come From?
To fully understand this overview of 401k plan, it is important to understand the plan’s name. It comes from the section in of the tax code that was designed to govern them and which came about in the 1980s with the purpose of providing a supplement to the employees’ pension.
During this period, the cost of running pensions skyrocketed, which is why employers started looking for an alternative. Today, many of those who work on a job that comes with a strong union if they have a government position, they are still most likely eligible for a pension. But, for practically all others, the 401k plan has been introduced as a replacement to pensions.
With it, the employees have a degree of control how their money is being invested. Most plans do this by spreading out the money through funds that include bonds, stock, and market investment.
One of the most used forms of investment are the target-date funds, which are a combination of bonds and stocks that that gradually become more and more conservative as an employee comes nearer their retirement. At the same time, every overview of 401k has to acknowledge that these plans come with many restrictions.
For most of them, getting to the employer’s contribution will not come immediately. Companies usually ask for a certain period of continuous employment before employees can gain access to a 401k plan.
There are also insurance clauses against the prospect of the employee leaving before a certain time period. Also, there are rules that govern when and how an employee can withdraw money and what are the penalties that come with these withdrawals.
When it comes to the process of overseeing the accounts, employers usually decide to hire outside administrators who also assist employees with their individual plans. An important part of the overview of 401k plan is the issue of how much should be put into it.
How to Utilize Your 401k
The general idea is to pay into it as much as possible, but the most widely used amount is 3% of the employee’s salary. There is a simple reason for this fact: any amount being paid into the plan is then matched by the company, but in most cases, this is true only as long as the payments do not go over 3%.
At the same time, the IRS also mandates the limits of the 401k plan contribution. As of 2008, the maximal amount that can be paid is $15,500, which goes to $20,500 for persons older than 49 years.
These savings plans can have a beneficiary who inherits the money in the case of the passing of the employee.
Lastly, for this overview of 401k, it is important to know that these savings plans are secured against any financial problem of a company include the alternative of its going bankrupt. Even in this scenario, the savings plan should stay secure and will not be terminated.
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