Understanding Your 401k Plan

A 401k plan is one of the most valuable tools that your employer can provide you. With the power of a 401k, you can create a nice retirement account for you and your family. Many employees neglect to contribute to their 401k and as a result, lose the leverage that they have available to them. Here are the benefits associated with a normal 401k plan and how they work.

Pre-Tax Savings

The first way that you are benefited by a 401k plan is by the allowance of pre-tax contributions. This allows you to deduct a certain amount directly out of your paycheck. They will deduct the amount out of your gross paycheck before the tax withholdings are calculated. This means that you probably won't even notice the small change in your take home pay. When you allow your employer to deduct a certain percentage of your pay, it makes the process automatic. Therefore, you don't have to worry about making yourself do it. An automatic deduction ensures that your funds will make it to where they need to go. The pre-tax benefit will allow you to contribute more money than you normally would.

Employer Match

While employer matches are quickly becoming a thing of the past, there are still many employers that will match your contribution. That is, they match the amount of money that you put into your account, up to a certain point. A common match is 50% of the amount you put in. Therefore, if you put in 8% of your paycheck, the employer will put in an amount equal to 4% of your paycheck and your savings is 12%. Employer matches are like getting free money to retire. Employers reward you for contributing to your own retirement account. When you begin to add up the contributions, over the 40 or 50 years of your working life, you will find the amount will quickly add up, especially with compounded interest.

Investment Options

Once you get the money into your 401k account, you can then begin to invest it in several different programs. Depending on the provider of your 401k plan, you will have a variety of things to choose from. You will probably have several funds to invest in as well as some possible stocks or bond packages. Most of the investments that you can pick from are of a long term nature.

This isn't a day-trading type of investment. Your 401k plan is designed to bring in a steady return over the long-haul. Therefore, when you are ready to retire, you will have a nice nest egg built up. After you are 59 1/2, you can start to withdraw from the account without penalty. From then, it’s up to you to decide how you enjoy the money.

Plan Participant

A plan participant is an individual who chooses to participate in a company-offered 401(k) plan. When an employer offers a 401(k) to employees, the employees will have the right to contribute pretax money to the account. When this is done, that individual is known as a plan participant. In most cases, the plan participants are eligible to receive matching contributions that are made by the employer. When the employer makes these contributions, plan participants generally must work for the company for a certain amount of time before being able to gain full access to the employer contributions, which is also known as vesting.