What is a 401k Plan
Millions of people save for retirement by investing in 401k plans every month. Now I’m sure some of you want to know, what is it? What is a 401k? Well simply put it is a savings plan which allows an investor to put a portion of their paycheck into it pretaxed and have that money grow tax deferred for many years.
The best part about the plan is definately the fact that it is tax defered. What that means is that any money which you put into the acount will be able to grow without being slowed down by Uncle Sam. That is pretty big when you consider how much taxes really take out of your income.
Of course there are some disadvantages to this plan. There is a maximum someone can put into their 401k every year. You can’t simply invest 90% of your income in the stock market live off of your spouce for 20 or 30 years then retire a decamillionaire, there are rules in place.
There is also a minimum age you can withdraw. The 401k withdrawal rules state that anyone who takes money out before they reach 59 ½ will have to pay a 10% penalty on their money, and that is in addition to the taxes. That means that if you take money out early a huge chunk of that would go to paying off these other bills. The plan is for retirement however, so taking money out early should not really be much of an issue.
There is a method that lets you get around this. You could always get out a 401k loan. That would allow you to get out some money from your account early without having to worry about paying either the early withdrawal penalty or taxes on your money.
The 401k loan rules are also a little hard however, you do have to pay it back with interest and depending on your plan you may not be able to deposit any more money until you do pay it back.
All and all a 401k can be a great way to save for retirement; it has helped a lot of people save up money for their retirement and continues to help people today. They key to using it correctly is leaving the money in the plan for the long term and not tapping into it until you need to.
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