Saturday, February 22, 2014

What Are 401K Retirement Plans?

By Krystal Branch


The title given to 401K retirement plans is related to the taxation code that it is governed by. The plan was first launched during the '80s as an add-on to the then existent pension funds. This particular plan is an option to save for retirement, which is sponsored by employers.

Prior to 1980, employees were usually offered a pension fund by their employer. This type of fund was generally managed by the company of employment and a regular amount was paid to the employee during their retirement. This option may still be available to those who work in government departments or belong to the unions. The costs related to the maintenance of pension funds are what have prompted the move to 401K plans.

401K plans allow workers the facility to invest a part of their earnings before taxation. Taxation is only applied upon withdrawal of the funds from the plan. The worker is able to choose the investment aspect of the money they wish to invest. Target-date funds are one of the most popular options to choose. This option comprises of a blend of bonds and stocks that normally leans toward the more conservative when the worker's retirement age is reached.

There are distinct benefits linked to 401K retirement plans. The first is the tax advantage. You will not be taxed on the interest, dividends and capital gains until the amount is withdrawn. During this time period, you will have the benefit of gaining compounded income from your account. If you join a plan at a fairly young age, this can make a huge difference to your total savings.

Another benefit is that your employer usually contributes a certain amount to your plan as well. The rates may vary, but there are employers who are prepared to match an amount of 6% of your salary to your fund.

Another benefit is that you are able to transfer the fund from one employer to the next. You could opt to leave the amount in your past employer's fund, however, this may attract fees that could eat into your eventual payout. The alternative is to arrange for a total rollover to the fund of your new employer. This option may only be available to you if you already have another job offer before you leave your current employer.

The investment options that you can choose from for your new plan may be the deciding factor as to whether you choose a rollover. If the available options do not suit your plans, you have the options to transfer the funds to a suitable IRA. If you are dissatisfied with any of these options, you can opt to withdraw the funds you have contributed. This option will incur a penalty fee and tax.

The options related to 401K retirement plans and the method of investment varies from one plan to another. You should consider your options carefully when you move from one employer to the next. Your main aim should be to hold onto as much of the funds as you are able and to find a re-investment plan that matches that of your retirement goals.




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