What is a 401k?

What is a 401k

By – Richard Adams
A 401K is a savings plans that is offered to employees by employers as a means of encouraging investing for the future and retirement. They differ from an Individual Retirement Plan (IRA) in that they are only offered through the workplace and both the employer and the employee can make contributions toward them. A 401K is a great investment opportunity, especially for people who are starting young and may have several hundred thousand dollars available to them when they retire. If you are at least 21 years old and are employed by a company that offers a 401K, you would be wise to take advantage of the opportunity.

Employer Matches

Most employers offer an even greater incentive for employees to save by providing matching funds up to a certain percentage of the employee’s contribution. For example, if you have five percent of your paycheck withheld every two weeks for your 401K, your employer may choose to donate half that amount, or 2.5 percent, into your account. In order to be eligible to keep the employer contributions, you usually need to stay with them for a set amount of time to be vested. Your vesting increases by the number of years you have worked for your employer, and after a set number of years, you are fully vested and are able to keep all money that your employer contributed to your 401K.

Tax Benefits

The amount of money you contribute to your 401K is done on a pre-tax basis, meaning you pay no tax on it until you make a withdrawal at retirement. Your 401K contribution for the year will show on your annual W2 statement, but you are not required to report it to the IRS.

Early Withdrawal Penalties

If your company allows you to borrow against your 401K before retirement, the amount you borrow will be subject to both a penalty and taxation.

Read more at:
Smartmoney 401(k) Center – 401(k) information center with various articles and tips and advice.
NPR : True Value: The Young Worker and a 401(k) – A talk about the value of 401(k) retirement savings accounts for young workers and retirees.