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401k Retirements

A 401k retirement plan is sponsored by your employer and allows you to save and invest for your retirement.  A 401k retirement plan can include mutual funds, bonds, or stocks or any assortment of these. You can usually change how your investments are distributed at any time. There is also a different plan referred to as a trustee-directed plan, where a trustee is appointed by the employer and that person makes all the investment decisions.

The government instituted the 401k retirement option of IRA in 1981 with certain tax advantages to persuade people to save for their retirement. The 401k is essentially a profit sharing plan for retirement. It is unlike most pension plans in that, contributions and benefits are voluntary.  401k retirement plans are covered by the Employee Retirement Income Security Act (ERISA), which assures that the 401k plan is protected from creditors and bankruptcy.  The plan offers higher yearly contribution limits, when compared to classic IRA’s.  your employer usually matches 401k retirement contributions.

The main advantage of a 401k retirement plan is tax deferral; the contributions are withdrawn from your paycheck before taxes are calculated.  Because of this, you can deferrer your taxes on the amount withdrawn until you take out the funds when you are in a lower tax bracket and can keep more of your money.  To avoid heavy fines and taxes you should not withdraw from your 401k until after you are 59.5 years of age and no longer in the employment of the sponsoring company.

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