How the 401(k) Plan Works
Congress decided in 1978 that many Americans needed a little bit of a push to save money towards their retirement.
They figured that if they gave us a way to save our money for retirement and save money by lowering our federal and state taxes, we might just go for it.
That is when The Tax Reform Act passed.
Portion of it was authorized for a creation of tax-deferred savings plan for employees.
It was known as the 401(k), which was named after the section 401, and paragraph (k) of the IRS Code.
You will often hear about the 401(k) advantages when you hear people taking about these plans like: Lower taxable income Free monies from the employer Earning and savings which accumulate and you don't have to keep remembering to make deposits into it A retirement opportunity which will have you not worrying about money now Sound way too good to actually be true? Well it is not.
You can get all that from simply investing some of your money into the company's 401(k) retirement plan.
You might not have retirement on your mind, but think of the difference just ten (10) years could make.
Taking the opportunity to invest in the employers 401(k) makes a ton of sense and you should take advantage and participate as soon as you can.
Starting early, say when you are 25, you could end up with possibly a million or so when it is time for you to retire.
What makes a 401(K) Plan So Different? There are four (4) things that help differentiate the 401(k) retirement plan and the other plans.
1) When you start your 401(k) plan with your employer, you specify how much of your money you want deposited each pay period.
There is usually a cap of fifteen percent of your earnings that you can contribute each month, and the employer has a right to limit this amount.
But the IRS does limit the total amount of annual contributions to $15 thousand (in 2006).
2) The monies you contribute come directly out of your paycheck, prior to taxes being calculated, and most importantly, before you can get a chance to handle it and spend it.
3) And if you are lucky, some employer's match a portion or percentage of what you contribute.
The employer has their own reasons to participate because of some compliance issues that you can learn about later.
Their matched portion is a great incentive for you to participate.
4) The monies that are contributed are given to the third party admin person who in turn invests the money in bonds, mutual funds, money market accounts, and where ever else it is fit.
And, you are the one who determines the percentage of your money that goes into each type of account, they don't.
They usually provide you with a list that you can make your choice from and some guidelines as to the risk levels of each type of account.
They figured that if they gave us a way to save our money for retirement and save money by lowering our federal and state taxes, we might just go for it.
That is when The Tax Reform Act passed.
Portion of it was authorized for a creation of tax-deferred savings plan for employees.
It was known as the 401(k), which was named after the section 401, and paragraph (k) of the IRS Code.
You will often hear about the 401(k) advantages when you hear people taking about these plans like: Lower taxable income Free monies from the employer Earning and savings which accumulate and you don't have to keep remembering to make deposits into it A retirement opportunity which will have you not worrying about money now Sound way too good to actually be true? Well it is not.
You can get all that from simply investing some of your money into the company's 401(k) retirement plan.
You might not have retirement on your mind, but think of the difference just ten (10) years could make.
Taking the opportunity to invest in the employers 401(k) makes a ton of sense and you should take advantage and participate as soon as you can.
Starting early, say when you are 25, you could end up with possibly a million or so when it is time for you to retire.
What makes a 401(K) Plan So Different? There are four (4) things that help differentiate the 401(k) retirement plan and the other plans.
1) When you start your 401(k) plan with your employer, you specify how much of your money you want deposited each pay period.
There is usually a cap of fifteen percent of your earnings that you can contribute each month, and the employer has a right to limit this amount.
But the IRS does limit the total amount of annual contributions to $15 thousand (in 2006).
2) The monies you contribute come directly out of your paycheck, prior to taxes being calculated, and most importantly, before you can get a chance to handle it and spend it.
3) And if you are lucky, some employer's match a portion or percentage of what you contribute.
The employer has their own reasons to participate because of some compliance issues that you can learn about later.
Their matched portion is a great incentive for you to participate.
4) The monies that are contributed are given to the third party admin person who in turn invests the money in bonds, mutual funds, money market accounts, and where ever else it is fit.
And, you are the one who determines the percentage of your money that goes into each type of account, they don't.
They usually provide you with a list that you can make your choice from and some guidelines as to the risk levels of each type of account.
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