FAQ on 401k retirement plans

Retirement schemes can be made either by the company one is employed in or by the individual himself. Businesses typically have a provision for retirement that is usually in the form of 401k retirement plans.

What are 401k retirement plans?
These plans gained popularity in the 1980s as a substitute for providing pensions. By this plan, employers could take a cut of the employee’s salary every month and place it in this plan to be withdrawn now or later. In addition, the employer could make additional contributions to these plans.

How to avail of 401k retirement plans?
401k retirement plans are usually chosen by the employer. They are quite flexible in terms of contributions. In addition, one can be a part of this as well as other plans. Usually, however, one is expected to work for a specified number of years in the same company before being eligible to apply for the same.

What about taxes?
The amount of money deducted for contribution towards 401k retirement plans is done prior to taxation. Therefore, the money is taxed only when it is withdrawn.

What are the main types of 401k retirement plans?

There are two main types:

  • Traditional 401k in which money is deducted prior to taxation. Tax is deducted once withdrawals are made. One cannot withdraw from this account until one is 59 ½ years old. Withdrawing prior to this is likely to result in a penalty.
  • Roth 401k is, however, more flexible. Deductions are taxed while they are made. One does not pay tax upon withdrawal. In addition, one can withdraw from the account whenever one chooses to provided one has had the account for at least five years.

Most companies offer the traditional 401k plan. They also usually match the amount deducted from their salary as contribution. It is thus a great way to save for retirement.

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