Individual Retirement Accounts

401k Retirement Plan

Typically, we don’t have a choice whether to work or not. Many people are stuck in jobs they don't like when they dream of becoming something different. Many of us dream of what we could do with our time, if it was all ours. A lot of those daydreams probably have us relaxing on a beach somewhere, sipping a cocktail after a long round of golf and a visit with the grandkids.

Unfortunately your retirement may not be that comfortable and you may even find the years you can retire rapidly shrinking with the rising cost of living today. This is why making provisions while you are still working is extremely important. One of the many options available to you is a 401k retirement plan that can help provide you an income when you retire.

How a 401k retirement plan works

There is a very simple principle to the way a 401k retirement plan works, making a 401k retirement plan very attractive as an investment vehicle for retirement account. You simply deduct a certain amount of money from your salary and your employer also contributes a matching amount into your 401k retirement plan. While the money is accumulating you can choose how you would like to have it invested within the options available in the 401k retirement account.

There are a few options available in a 401k retirement plan such as:

  • mutual funds,
  • money market funds,
  • bond funds of varying maturities and
  • various stock funds.

Some companies allow employees to invest in company stock in their 401k retirement plan as well. Generally stock funds give the best performance to the individual who chooses to invest with caution.

Tax Considerations of 401k retirement plan

The reason a 401k retirement plan is so attractive is the fact that while the funds are accumulating, the money in a 401k retirement plan is non-taxable. You do not have to pay taxes on these retirement account savings. Because you can choose to contribute to your 401k retirement plan on your salary pre-tax, you pay a lower income tax rate. However there are limits as to how much money you can contribute pre-tax to your 401k retirement plan annuall, just like there are limits to contributing to individual retirement plans.

There are also benefits from contributing funds from net pay as money in your 401k retirement plan that is contributed after taxes and is not taxable. Contributing to investment retirement account in this manner does not help out an employee’s present tax situation, but it does however help in the future. A 401k retirement plan can grow considerably over the average working life of any employee and can provide comfortably well into old age and therefore this is certainly an investment plan worth looking into.