Planning for retirement is one of the most important and crucial decisions in one’s life. But what plan is right and what is not is a matter of question. There are so many retirement plans that are available nowadays. With a vast variety to choose from, the most common one is 401k retirement savings plan. Here is all you need to know about it:
What is a 401k retirement savings plan?
This plan is sponsored by your employer, which means he/she is your 401k retirement planner in a way. In this unique type of account, you (the employee) can save your paycheck before tax deductions. You are generally given an option to choose from taking compensation in cash or transferring a percentage of your salary to the retirement savings account. It is named after section 401k of the Internal Revenue Code.
Tax advantage
The most important point of 401k retirement savings plan is that it offers a tax advantage to the employees. The amount of paycheck that has been deferred for retirement is free from any kind of taxation like capital gain, dividends, and interests. This doesn’t mean you are tax-free for a lifetime. You will have to eventually pay the tax when you withdraw the amount.
Investment options
These retirement plans offer you flexibility in your investments. You can invest in short-term and long-term assets with ease. You can also invest in company stocks at discounted rates. You have a variety of choices to make on to how to invest your assets in stocks, mutual funds, and others.
401k loan limits
You can also get a loan from your 401k plan. You can borrow up to 50% (limited to $50,000) of the account balance in your retirement plan account. The loan should be paid back in 5 subsequent years. But if the loan was for home purchases, then you can get a longer payback period.
This 401k retirement savings plan offers you, as an employee, various benefits like tax advantage, flexibility in investment, availing loan etc. It has been there for long and will continue to be there in the retirement industry. So, when your employer is providing you 401k retirement plan, you should opt for it for a secure future.