401K Plans - An Introduction

401K Plans - An Introduction

401K Plans - An Introduction

Unless you have a college degree in finance or investment banking, retirement plans can sound like a foreign language. Letting the vocabulary intimidate you will hurt your plans to retire comfortably. Understanding the different plans is important to knowing what you need to do to be financially secure when retirement arrives. It may seem far away, but establishing a nest egg takes time. Starting early is key to a comfortable retirement.

A 401 plan, regardless of the "k" or "a" after the numbers, is a retirement plan that allows employees to set aside funds for retirement. Contributing to a 401 plan is a tax shelter. This means that the money invested is taken out of your paycheck before taxes are calculated. Consequently, your taxable income decreases and you pay lower taxes, while your retirement investments increase. Taxes are collected on the funds when you withdraw the money during retirement. Uncle Sam will always get his cut of your money, whether it be now or 30 years from now.

A 401k plan is a type of 401a plan. The general rule is that 401a plans are offered by government employers and 401k plans are offered by private companies. The regulating factors are very similar.

401 plans can be voluntary and others are mandatory when hired by a company. There are numerous ways that employers may match funds in a 401 retirement plan. The employer may match a fixed percentage of the amount you the employee contribute. The company can determine a fixed dollar or percentage amount, and may or may not require employees to contribute. Another possibility is that the employer could match your contribution within a given range (i.e. a variable employee match).

Don't let your eyes glaze over when you are given the details about such items when hired at a new company. Take the time to really understand the various options and how to make the most of the company's matching contributions.

As an employee you can choose various investment portfolios, usually an assortment of mutual funds that focus on stocks, bonds, or money market investments. Many companies offer their stock for you to purchase as well. Monitor the return on your retirement investments to stay informed of the money your investments are earning for retirement. If a certain fund consistently loses money, you should move the investments to a higher yield investment without accumulating any fees. Most companies allow you to reallocate your money in these various options at any time.

There are stringent regulations as to how much money you can put in yearly as well as penalties for withdrawing money from a 401 plan prematurely. Determine what percentage of your investment will be taken by taxes and penalty fees. Generally, 20% goes to taxes and 10% will be taken as a penalty. This causes people to think twice about taking retirement funds out early. The government penalizes heavily to discourage people from using their retirement money for non-retirement activities.

Reevaluating your investment portfolio a minimum of once a year will assure that you are monitoring your retirement money. Generally, quarterly reports are sent out to encourage you as an investor to determine if your money is earning as much as possible. Knowing the details of your investment is the most influential tool you have when it comes to retirement plans.

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