Planning for retirement can be a daunting, task because there are so many saving options. A 401k plan is one of the more popular options because it simplifies those options. The many 401k benefits include tax-free deductions, employer matching of contributions, early removal options and investment control. These elements all combine to form a retirement plan that gives its owner strong options for the future.
A 401k program is a retirement plan that traditionally takes deductions from a paycheck and deposits them directly into a savings account. Based on investment choices, that money earns interest according to a number of stock market factors. At a specified retirement age, the money and all of the accrued earnings are available to the holder.
One of the most compelling 401k benefits are its tax-free deductions. The money that is removed from a paycheck comes out before income taxes are removed. This is an enticing aspect of the 401k plan, because it means that this money is earned tax-free until it is removed at retirement.
Employee matching is another of the 401k benefits that appeal to retirement planners. Many employers match an employee's contributions up to a certain percentage of that paycheck. This essentially is free money for anyone investing in a 401k retirement plan. Most retirement plans, however, have rules about being vested in order to receive these contributions. This means that the employee does not get to keep that free money until he or she has been with the company for a specified amount of time.
Other 401k benefits are the plan's ability to act as a savings account before retirement. Contributors to a 401k frequently use the money saved from paycheck contributions in emergency situations by removing the funds prior to retirement. This money is removed just like it would be from a bank account and can be used for anything. The one penalty for early withdrawal is that taxes will be applied, and the money's owner will receive a smaller portion of the total because of this taxation.
For many investors, the biggest of the 401k benefits is the level of control that it provides over the future. Investments in a 401k are a mixture of stocks, bonds and mutual funds. Most programs offer a variety of choices using these three investment elements. Based on whether a contributor wants to be conservative, aggressive or somewhere in between, there is an investment strategy available. Another benefit of this control is that the contributor can change the investment strategy at any point.
