401k is a savings plan offered by the corporation to the employees, in which each month the employees will contribute some part of their salary in the savings account for retirement. In some companies, the employer also will contribute equal amount for the savings each month. This unique plan is different from other retirement plans in number of ways.
When you agree to contribute to this plan you tell the administration how much amount you want to save into this account. Usually employees can contribute up to 15% of their total gross salary into savings each month. However, the employer can restrict the amount you contribute. It might be good if you are asked to contribute more than 15% but it becomes difficult to manage the other expenses. The International Revenue System has limited the contribution up to $45,000 each year.
The money you deposit in retirement plan of 401k comes directly out of your salary before the taxes are calculated. Hence this would substantially reduce your gross salary each month and helps you to pay less tax annually.
In some cases, the employer also contributes an amount equal to that of your contribution. The free money the company offers you is indirectly an incentive for encouraging you to join this retirement plan. The money you transfer into savings will be used for investing in mutual funds or bonds. You have the liberty to choose the investment plan following some guidelines vested. In this way, your small savings multiplies and develops into a big amount when you become old and retire.
You are permitted to withdraw the money in case of an emergency. But the money you will withdraw will be subject to taxation and additionally a penalty of 10% will be imposed on that amount which will go to the IRS. The federal government has laid down such rules in order to prevent you from withdrawing money which is solely meant for your future.
On the whole, 401k is highly beneficial to you in planning your future life. For safeguarding your money in case something happens to the employer the entire deposit amount will be held in custody account.