What exactly is a 401k retirement plan?
In its essence, a 401k is a retirement plan.
It is a retirement savings plan that is sponsored by one’s employer. The way it works is that it has provisions for the employee to save and invest a fraction of their paycheck before they have to give out their taxes. In other words, we can say that the you do not pay the taxes until this fraction of the money is withdrawn from your salary account.
Why is it called 401k?
The appellation was given following a section of the tax code that governs the retirement plans.
The difference between the 401k retirement plan and an ordinary pension fund is that in the case of a 401k retirement plan, it is you who has absolute control over how your money is invested. In the case of the pension plan, the fraction from your paycheck just goes into the pension fund. With 401k retirement plans, you can choose to invest in mutual funds or a mixture of mutual funds and stocks or even in bonds. It is entirely upon your own discretion.
All these points would have definitely shed light upon the topic of 401k retirement plans and would also have given you a glimpse of its positive aspects. However, these plans are not without their own set of disadvantages and shortcomings. A very common complaint that is often heard about 401k retirement plans is that one cannot tap into the employer’s fund immediately. The employer generally requires you to work for a certain amount of time before they can get their hands and control on their portion of the savings. There are also complex instructions in place for if and when you decide to pull out funds before attaining the age of retirement.
Hence, one is advised to fully peruse over the pros and cons of such 401k retirement plans before plunging into the opportunity of investing in them.