The 401k was named after the 1978 Internal Revenue Code 401(k) and
is a retirement plan that is available in the United States. It
is generally defined as an employer-sponsored qualified retirement
savings plan that allows individuals to save for their retirement while
deferring any immediate income taxes on the money they save or their
respective earnings until withdrawn.
In some cases, employers may make matching contributions to the plan or
a profit sharing feature may be added, making it an especially
lucrative way to save for retirement.
Overall, 401k plans are an easy way to save because funds are
automatically deducted from you paycheck, meaning that you won’t be
tempted to spend rather than invest.
With some 401k plans, participants can direct their own investments and
will be given a group of products from which they may choose. In
other instances, an investment professional hired by the employer will
determine where the money is placed.
Even self-employed individuals are able to open what is known as a Solo
401k, realizing the tax deductions that were only available in the past
to employees. This allows for better retirement planning for
those who own their own business, which is often an issue with this
sector of the population.
Some confusion occurs as to how and when employees can withdraw these
assets. Most likely, a retirement age is defined by the plan and
those who wish to withdraw funds before they meet the minimum age will
face a financial penalty.
Those who wait until after retirement to withdraw the money that was
placed in the 401K will most likely be in a lower tax bracket at that
time so, ultimately, they’ll be responsible for paying less taxes on
their investment earnings during retirement than if they withdraw early.
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