A retirement savings program, known as a 401(k) plan, is offered by US companies. It allows employees to contribute a portion of their income, which is then matched by the employer.
What Is a 401(k) Plan?
A 401(k) is a retirement program in the US offered by employers. With a 401(k) plan, employees can get tax breaks on the funds they contribute. Contributions are automatically taken from the paychecks. These are then invested in funds that the employee picks from a list available to them.
However, some 401(k) management companies do not allow employees to choose where funds are invested. In any case, this will be explained to the employee as they sign up for the plan. 401(k) plans have an allowance limit of $20,500 per annum as of 2022 and $27,000 for those aged 50 or more.
This plan derives its name from the section of the tax code that established it – subsection 401 (k). Employees contribute funds to an individual account by signing up for automatic deductions from their paycheck.
How to Get a 401(k)?
The employer offers a 401(k) plan. Unfortunately, not all employers offer it. In that case, you can still enjoy its benefits via an individual retirement account.
What Are the Benefits of a 401(k) Plan?
One of the most obvious benefits is that most employers will match a portion of what you contribute to the plan. Some match the contributions dollar for dollar, while others match it only to a certain percentage.
Employers can also offer non-elective contributions. That means they may decide to provide a set percentage to the plan for all workers whether they put any of their money. For instance, an employer can choose to offer 3% of the employee’s pay per year to the plan.
The other option used by employers is the profit-sharing contribution. In this case, they will offer a set dollar amount into the plan where it makes a profit. Different formulas are used to decide how other employees will share the amount.
There are different types of 401(k) plans. The main ones are traditional 401(k) and Roth 401(k). Traditional 401(k) plans come with an upfront tax break on the contributions. In contrast, Roth 401(k) are after-tax contributions. That means when you withdraw the funds; the IRS does not get a cut on your money.
If you decide to quit your current job, you can take your 401(k) contributions with you. Instead of being placed in a box with you when you leave, it will be rolled over into a new account that works with your new employer. A 401(k) rollover is relatively simple, and your bank can help you do it.