Financial Planning

What is a 401K?

Many people have heard of 401K programs but may not be entirely sure what they are, how to get one, and then what to do with a 401K once they have one! It’s no wonder that there can be some confusion about different types of savings and investment plans  – since most people did not have a course about it in school, and some employers do not bother to educate their employees about options. However, continue to read on and you will get a clear idea of what a 401K plan is.

 A Tax Free Savings Plan. A 401K plan is a plan that can only be offered through your place of business and is also known as an employer-sponsored retirement plan. This is because the IRS allows special tax breaks to companies and their employees who use a 401K plan to save for retirement. A 401K plan is also called a defined contribution plan as well, because the plan allows employees and employers to contribute specific amounts or percentages of funds into the 401K plan on an annual basis, free from taxation! In other words, your pre-tax dollars go into the plan and can be saved, invested, and accumulated until you retire without any tax payment required. (That is, only if you keep the funds in the account until you retire or to age 59 ½ – early withdrawals will be taxed at regular income tax rates AND penalized at an additional 10 per cent.) › Continue reading

Tuesday, March 16th, 2010 Financial Planning, Saving Money No Comments