Whether your employer offers one or not, you should learn the basics of a 401k account. This information will come in handy if your company ever switches to a 401k plan or you change jobs and are able to invest in a 401k. These accounts give you the ability to have some control over your retirement fund, unlike pensions where the company controls the funds.
Another benefit of 401k plans is how they are taxed. When you contribute to a 401k plan, the money you invest is not taxed as income in the year that it is earned. Instead, it is taxed as ordinary income when you withdraw it from the retirement account. Since it is likely that you will be making less money when you retire than you do now, this can result in substantial tax savings.
If you make less than $110, 000 per year, you can contribute up to $16, 500 per year to your 401k, and the total contribution including your employer match cannot exceed $49, 000. The limits increase to $22, 000 and $54, 500 once you reach the age of fifty. If you make more than $110, 000 per year, your employer may be required to reduce the amount you can contribute so that you are not investing a higher percentage of your income than the average worker at your company.
Most companies that offer 401k plans also offer employer matching. That means that if you invest in your 401k plan, your company will also invest in your retirement plan on your behalf. Some employers match the full amount you contribute up to a certain percentage, while others only match part of your contribution. Employers may allow you to choose what the employer match is invested in, or they may invest the employer match portion in company stock or another investment of their choice.
The money that is invested in a 401k by your company match may or may not be vested immediately. What that means is that in some plans, you have to wait a certain period of time after the investment is made before the money is fully yours. The investment choices available to you in your 401k plan are chosen by your company. You can decide how to invest your money within those options. Sometimes the options are quite limited.
Depending on your company’s policies regarding their 401k plan, it may be able to take out a loan against the vested balance in your 401k. In most cases, the interest rate is very low compared to a traditional bank loan. If you do take out a loan against your 401k, you will be paying yourself back with interest. The downside is that if you lose your job before paying back the full amount, the balance will become due immediately and you will be hit with a tax penalty if you can’t pay it back at that time.
It’s good to have a little knowledge about 401k plans in case you ever work for an employer who offers them. They are becoming very popular, and you never know when your employer might decide to start offering a 401k plan to its employees.
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