Traditional 401(k) plans are retirement plans sponsored by employers where a part of employee’s salary is directly deposited in a 401(k) account before tax is deducted from it (pretax). The ‘part’ deducted from the salary is known as ‘contribution’. Often even employers choose to match a percentage of the employee’s contribution to be deposited in the 401(k) account. These contributions make the principal amount of the retirement plan where these funds are in turn invested (in bonds, stocks, mutual funds etc) to maximize earnings from the savings. This translates to savings for retirement as well as imparting growth to employee’s money. And the best part is that all the earnings from such investments are not taxed until a withdrawal is made from the fund.
Fundamentals of 401(k) Plan
Contributing to your 401(k) plan
Advantages and Benefits of a 401(k) plan
The 401(k) saving vehicle offers a multitude of benefits to the retiree or the employee saving for retirement. The plan is even more beneficial for young employees starting at their first jobs. Over a long term period the tax advantages of the 401(k) plan becomes more evident and help retire with good amount of funds.
Tax advantage:
401(k) plans are popularly known for their tax advantage. Generally 401(k) accounts are made up of pre-tax dollars. This means, that tax is not deducted from the amount of contribution the employee makes from his salary to the account.
General Rules of 401(k) account
The 401(k) plan was designed to encourage more and more employees to save for retirement where the employees invest tax deferred dollars (from their pay) into a 401(k) account. The funds and earnings from investments of these funds in the account are taxed only upon withdrawal. This provision allows the employees to save for retirement and at the same time it provides them with greater tax advantage. Hence(,) 401(k) plans are preferred by most employees and offered by majority of employers.
Since 401(k) plans are offered and maintained by the employer, it is the employer who decides on the rules, regulations and facilities of the plan offered. And owing to the flexibility of the 401(k) plan, these vary from employer to employer.
401(k) Debit Cards
One of the benefits of the 401(k) plan is that in difficult times, one can take loans against one’s 401(k) account. These loans are different from other traditional loans as in this case a person borrows from his or her own savings. As one borrows from their savings, there are no hassles like credit check or other securities when opting for a 401(k) loan. But since the 401(k) accounts are maintained by the employer, granting provisions for a loan or granting a loan itself is solely at the employer’s disposal. In addition to that there are also certain rules that govern these loans. 401(k) debit cards work almost on similar principles, rules and regulations. When one avails the facility of a 401(k) debit card, it is actually a loan that one takes on their 401(k) savings account, where the loan works slightly differently from traditional 401(k) loan. Also 401(k) debit cards are not directly linked to the retirement savings account and hence the same kind of restrictions is not subjected to them.
SIMPLE 401(k) plan
The abbreviation SIMPLE stands for Savings Incentive Plan for Employees and there are two types of SIMPLE plans available, namely SIMPLE IRA and SIMPLE 401(k) plans. A SIMPLE 401(k) plan is essentially a cross between a traditional 401(k) plan and the SIMPLE IRA providing some benefits of both.
