| How does a 401K Work |
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A 401k plan is a tax deferred retirement plan offered by your employer. Unlike many other retirement plans available to individuals, only employers can sponsor and offer a 401k plans to their employees. You, the employee decide how much of your pay check you wish to deposit into the plan based on whatever you can afford and the IRS strict regulations that limit your amount of contribution. The amount that you decide to contribute to the plan is then deducted from your pay check (pre-tax) in other words, you able to invest and made contributions before Uncle Sam (the IRS) takes his cut and deposit it into the plan. Often times the employer will match your contribution up to a certain percentage, although your employer is not required to do so.
Responsibility: it’s your employer’s responsibility to administer the plan in accordance with current laws and regulations. They determine who is eligible for the plan and how much they can contribute. The 401k plan is a great way to begin preparing for retirement especially if you’re not someone who is disciplined enough to save on your own. If you currently have no planned retirement and your company offers a 401k plan, it’s a good idea to seriously consider. The sooner you start the better and the more you’ll have when it’s your time to retire.
401k drawbacks: one of the biggest drawbacks is accessing your money in a hurry. Unfortunately the 401k plan doesn’t work like a traditional checking or savings account. Accessing money could be difficult and costly, and besides, it’s not designed for you to have easy access in the first place, that’s why it’s called a retirement account and not an emergency account. Make sure you have another account set up for emergencies. However, some plans do allow you to access your money in the event of hardship and other dire needs. Check with your employer before you invest. |
