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Save Up For the Golden Years: What is a 401k Plan?

Retirement is something most working veterans look forward to. Not only will their years of hard work finally pay them off, but they finally now have all the time to enjoy life and spend it with their family. It is vital that aside from the retirement money these people will receive, they should have also saved up for the retirement. This is where retirement plans come in. Being the most popular is the 401k Plan, which was passed in 1978 and was first used in the 80s. What is a 401k Plan?

The 401k Plan got its name from its section number and paragraph location, section 401, paragraph K, from the Internal Revenue Code. It is a retirement investment plan that is set up through an individual's employer and their contributions are instantly deducted to their every paycheck. The best part of this plan is the contribution does not include an income tax deduction. The money saved in one's 401k account has not yet been deducted of any taxes. If one withdraws money from the account, it will then be taxable and will be added to the income in the year of the withdrawal and taxed at the marginal tax rate. Simply put, the taxes on the 401k account will be deferred later on. This can be offered early on in someone's employment, and it is advisable to participate in it as soon as possible.

Now there's an idea of what is a 401k plan, it's time to know how it works. An individual has the option of how much of the salary goes into their plan. Typically, 15 percent is considered the limit, but an employer can limit the account. Saving up for retirement in this kind of plan can also be more helpful to someone, as the money is deducted even before it reaches their hands. This is to ensure an amount goes into the account every month without fail. However, in some 401k plans, a person can borrow from the account in case of an emergency or in times of grave need. The 401k retirement plan also offers a lot of bonuses and benefits. The most important being, is that it is non taxable. While the money is inside the 401k plan, one can forget about taxes on any capital gain, dividend or interest. The withdrawal tax is also commonly less than the tax deferred on one's initial contribution. However, the 401k plan also, like any other plans available, has rules and penalties that must be observed. Withdrawing all the money from the plan before reaching the age of 59 can merit a 10% penalty. This defeats the entire purpose of saving up for retirement and hinders the growth of the plan.

The 401k plan is quite the best way to make sure there is money waiting for an individual when the time of retirement comes. It is also so easy that one can even forget that they are actually saving that much money until the time of withdrawal comes. It is just important to know what is a 401k plan and discuss it with the employer when one decides to start saving up.