A 401 (k) retirement plan is one of the most reliant and beneficial plans for employees who are looking for retirement benefits from their employers. A 401 (k) retirement plan offers a variety of features that would make any employee jump at this opportunity to save, and have money ready for when it’s time to take yourself or the misses to that long awaited cruise by the Nile River, or perhaps experience true Italian cuisine in Bologna, a genuinely great city in Northern Italy that provides Italians (and it’s tourists) beloved food that every can enjoy eating. None the less, a 401 (k) retirement plan will ensure you have money for a secure financial future when you choose to retire.
Benefits to a 401 (K) Retirement Plan
A 401 (k) plan is a retirement plan sponsored by your employer. A piece of your paycheck gets put into your 401 (k) retirement plan before tax season, that money is not taxed until taken out for your retirement use. With a 401 (k) retirement plan, you have the leisure to choose where your money gets invested in. So, most plans gives you the option to select from a few mutual funds to increase your savings. Most popular use of investing your 401 (k) is through a conservative approach, investing into stocks and bonds (target-date funds).
How Employer Matching Contributions
Not only are there tax advantages for your work retirement plan, your employer could match 50% of your first 6% of pay you save; a very common match in business offering 401 (k) plans. So, in this scenario, let’s say you make an income of $50,000 a year. If you contribute 6% of your income to the plan, that’s $3,000 dollars. In addition to the $3,000, you will get $1,500 in matching employer contributions (($50,000 x 6%)50% = 1,500 in matching employer contributions). 50% return on your investment is pretty lucrative.
Other matching employer contributions include a 3% match. So let’s say once you have put in 3% of your $50,000 earning to the 401 (k) retirement plan, your employers will match you the 3%. In other words, the amount saved and earned is genuinely the same thing. 3% of $50,000 is 1,500 added to your 401 (k). Your employer will add $1,500 of your 3% 401 (k) investment to the plan to match it.
Each company does their matching a bit differently. Some wait for 6% others 3%, depends on the company and their policies. Make sure you ask them their policies, because not every company follows the same 401 (k) plans.
Still, tax deferred earnings are great with 401 (k) plans
Tax Deferred Earnings in 401 (k) Retirement Plans
Once money gets put into your 401 (k) retirement plan, the money you have to give back to the U.S. government decreases. Let me explain. If you put money into your 401 (k) retirement plan, you are subtracting money that comes straight from your paycheck. When money is taken out from your paycheck before it is taxed, your income tax will become lesser, than when having more money in your paychecks. Hence forth, you pay less money on your income tax, and that makes your tax bill decrease. This means you “defer” or postpone payment on your income tax for your 401 (k) retirement plan. You won’t have to pay income tax until you touch the money or your retirement use, etc.
The irony is, you could be living in a state that doesn’t even have, or has lower income tax, leaving you more money to spend.
Also, for many people, their income tax, and tax rates are lower at retirement in general.
Can’t Touch My 401 (k) Retirement Plan
There are strict rules and regulations established by the government when it comes to taping into your 401 (k). The general rule is you have to be at a certain age in order to tap into your 401 (k) retirement plan. But, again things like medical bills, qualifying disability, and other circumstances can allow you, the employee to touch your 401 (k) reserves without penalty. The choice is yours, but the sooner you start saving, the more money you will have to tap into when needed (I suggest you follow the rules to not receive a penalty for tapping into your resume).
They Can’t Touch My 401 (k) Retirement Plan
If you feel like the company you are working for is on shaky grounds and may even go under. Not to worry! Your 401 (k) will be protected. Legally the 401 (k) must be put into a trust fund. This fund cannot be touched by anyone. The only way you can touch this 401 (k) saving is by legally following the trust rules. So if a company files for bankruptcy, your 401 (k) retirement plan will not be touched by your employers. Nor can the bankruptcy estate liquidate it. But what you should do if your company looks like it’s in bad shape, is to roll over your 401 (k) plan to the IRS. This will help you avoid a 10% withdrawal penalty and a variety of income taxes for touching the retirement plan prematurely.
It Protects Your Money
There is a convenience in having someone save your money for you. Not many people trust themselves, unless they have unwavering willpower to not touch their own savings for any given reason. Unless conferred to do so by their own personal and logical needs and necessities calling them out to do so.
What I am trying to say, about the 401 (k) plan, is that it will act like a babysitter for you. Protecting your money for when it’s time for you to be eligible to withdraw from that account. Having it saved in the trust fund is very convenient for all employees. It will save money for you for those rainy days. So let’s face it, you’re bound to have a few mishaps occurring by the time of retirement. Better to save money now than later for when you need it.
The 401 (k) is one of the most relied upon retirement plans used by employers and employees today. If you don’t belong to a union, or can’t receive a pension plan by the government. A 401 (k) retirement plan is a better alternative than the rest.