Since their inception, 401k plans have been a popular vehicle for individuals to invest for their future. 401K plans offer many benefits including relatively high contribution limits, tax benefits, and no income requirements.
If your employer offers a 401k plan for retirement investing you may be wondering what is the basic structure of a 401k plan? While your choice of investments will vary from plan to plan, all 401ks operate in much the same way, with funds contributed on a pre-tax basis and contribution and withdrawal limits.
The Retirement Center at online brokerage ETrade can provide you with comprehensive information on 401k and other retirement accounts, and assist you in finding the retirement vehicle that is best for you and your unique situation.
What Is The Basic Structure Of A 401k Plan And How Do They Work?
What is the basic structure of a 401k plan? 401k plans are sponsored by your employer and allows you to authorize your employer to defer pre-tax dollars from your paycheck and invest them in the funds that you have chosen from those offered in your employer’s plan.
You decide how much money you want to invest in your 401k account, and this money is taken out of your paycheck on a weekly basis. You can decide if you would like a specified dollar amount or a percentage of your income to be invested.
Regardless of which option you choose, the funds will be removed from your paycheck prior to taxes being calculated on earnings, therefore lessening your tax liability and increasing the amount of funds available to you for investing.
Your employer may offer matching contributions, which is a major benefit to you. This is free money for you to invest, providing you with more investment power and greater potential for realized gains. You should contribute the maximum amount to realize the full employer match to get the most out of your 401k account.
Accessing The Funds In Your 401k Account
What is the basic structure of a 401k? Funds in your 401k account are earmarked for retirement and therefore available for penalty-free free distributions when you turn 59½, with Minimum Required Distributions after you turn 70½.
The IRS imposes stiff penalties on unqualified withdrawals prior to you turning 59½ including personal income taxes and an additional 10% early withdrawal penalty. Some plans allow for you to borrow a certain percentage of your account balance, but you will have to pay back the funds borrowed with after-tax dollars with interest.
If you do utilize a 401k loan keep in mind that if you were to lose or leave your job for any reason, the entire amount borrowed will come due within 60 days or be subject to personal income taxes and early withdrawal penalties.
If you or your employer terminate your employment, you will have early access to your retirement funds. You may choose to leave them in your old 401k, transfer funds to your new employer’s 401k plan or an IRA, or you may cash out your account and pay the taxes and fees.
What you do with your 401k after leaving your job is an important decision and should be carefully considered. You can access the Retirement Planning Center at online brokerage ETrade, to find out which option is best for you.
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