The 401K plan is a piece of retirement savings legislation created by Congress in 1981. It gets its name from the Internal Revenue Code section that describes it, section 401k. It is a special type of account funded through pre-tax payroll deductions by your employer. Through a fund manager the funds in this account are invested in a number of different stocks, bonds, or mutual funds.
As pre-tax deductions they reduce your annual taxable income and as they earn dividends or basically as the investments make more money, your are not taxed on any capital gains, dividends, or interest made on these investments until you withdraw them at retirement. Even then the taxes will be small since these funds are usually your only source of income when you retire.
The 401K plan is one of the more popular retirement plans for wage earners. Those who are professional and/or are self employed have other retirement funding opportunities available to them with their own special tax advantages for annual and long term profits made from the funds.
The 401k does have its drawbacks in that if you need to borrow money from the account you must have a good qualifying reason and even then the maximum you can borrow from the account is 50%. For the wage earner, the 401k is probably the best choice. Roth IRA’s and other investment vehicles are more suited for the variable or multi income individual.
Tags: 401K plan, Retirement PlanCategory : Business plan