When deciding which job offer to accept one may consider many factors: salary, hours, commuting distance, vacation time, opportunities for advancement and benefits such as health care plans and retirement packages. One of the best retirement benefits that workers can receive from any company, and one of the perks of accepting a job at a certain company, is a 401K retirement plan. But, what is a 401K and why is this benefit something you should look for when seeking employment?
A 401K is a retirement plan that helps you put aside money from your monthly income for retirement. The money put into a 401K comes from an employee's gross monthly wage (salary prior to taxes) and is considered by the IRS as non-taxable income until the money is withdrawn at the time of retirement. Employees contribute to and increase the savings in their 401Ks by designating a certain amount of their monthly wage for transfer to this savings plan. This money will be withdrawn from an employee's paycheck and deposited in the 401K plan automatically. Employers are also responsible for contributing to an employee's 401K and can do so either with momentary compensation or by providing shares in the company's stocks.
How Does A 401K Plan Work?
Not all 401K retirement plans are identical but all must comply with the basic rules and regulations as put forth by US tax codes. Under these regulations, companies must set a maximum percentage that an employee can contribute to his/her 401K and most employees will usually opt to contribute between 1-20% of their salary to their 401K plan. This means that if the limit you can contribute to your 401K is set at $15,000 a year, your salary is $50,000, and you as an employee choose to contribute to your 401K the maximum amount allowed, then you will only be taxed by the government on your salary after your deposit into your 401K. This means that only $35,000 of your yearly income will be taxed. This is the main benefit of saving for retirement with a 401K plan. However, if money is withdrawn before the age of 59.5 then you will have to pay taxes on the money and also pay a 10% penalty fine to the IRS.
Where Do I Invest My 401K
401Ks are not just a savings account; they also can serve as an investment. Employees can choose how their 401K funds are invested and they can decide into which stocks and bonds they wish to invest. Most companies employ a 'plan administrator' who manages the company's employees' 401Ks and will help employees decide where and how to best invest their 401K. Plans can be invested in stocks, mutual funds, bonds, etc., and most companies will provide their employees with a list of investment choices and information on the risks involved with each investment. Under certain circumstances employees can also take out a loan against their 401K plan but this is allowed only in extreme situations.
401Ks Are Mobile
One of the greatest advantages of having a 401K retirement plan is the fact that this plan is mobile and can be moved from company to company if you decide to switch jobs. If your new job does not offer a 401K plan then you can transfer your plan from your old company into a professional financial institution and change the account into an IRA account. It will then continue to function like a 401K savings plan. You will not loose this wonderful retirement benefit just because you decided to change jobs.
Benefits of a 401K Retirement Plan
• A 401K retirement savings plan is free from both State and Federal taxes
• 401K plans are provided with a range of investment options and are monitored by a professional who deals with your investments
•Your employer contributes to your 401K
• Any gains you make on your 401K investments are tax deferred
• Under certain circumstances you can take loans on your 401K plan
• Money is withdrawn from your salary for a 401K before you receive your pay check so you don't have to worry about not being able to stick to the plan
Article written by Nicole Sivan