The Beginners Guide To Understanding Your 401k Plan

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Most of today’s workforce is likely to rely solely on their 401K plan for retirement. Simply defined, a 401K plan is a type of account funded through deductions out of your payroll. These types of accounts are supposed to set you up for retirement. Any funds put into a 401K plan will not be taxed until they are withdrawn. There is, however, a limit to each persons 401K contribution plan. This limit is defined by the type of plan you choose, your salary and certain government guidelines. As of 2019, the government guidelines only allow for a max of $19,000 in contributions.

Advantages to a 401K Plan

When you decide to invest into a 401K plan, there are a few key benefits you will gain once you sign up. These benefits include tax advantages, employer match programs, investment customization, loan withdrawals and switching the account to another employer. Typically, a 401K retirement plan is favorable in terms of the tax treatments it will receive. Since the contributions of dividends and interest are not taxed until it is withdrawn or dispersed, the money can compound while it waits in the account.

A 401K employer match program is another benefit. You can think of it as free money. Many employers will match up to a certain amount of the employees contribution into their 401K plan. Typically, an employee will place a certain percentage of their paycheck into their 401K plan. Their employer will match the amount that the employee puts away. If an employee puts away a few hundred in 401K each year, their employer will also put in the same amount. These match programs usually only go up to a certain percentage of a persons salary. Typically, a company will start to match employee contributions after that employee has been with the company for a certain amount of time. Not investing the max match amount is equivalent to walking away from free money.

Disadvantages to a 401K

401K plans also come along with some disadvantages. In some cases, you can take a loan out of your 401K plan. That is not the disadvantage. The disadvantage is that your employer may not offer a 401K loan. If they do, you might not be eligible. If an employee is fired or quits, the 401K loan typically must be paid in full within 60 days. If this requirement is not met there are significant penalties.

Changing Jobs with Your 401K

If you started your 401K at one job, but will be switching employers soon, your 401K does not have to stop. It can follow you to a new employer. There are four main different options you have when switching employers. 1. Leave your plan with your old employer 2. Rollover your 401K plan and move the assets to an IRA 3. Complete a 401K rollover to your new employers 401K plan 4. Cash out your proceeds
Ultimately, signing up for a 401K plan has advantages and disadvantages. It depends on what your employer offers and what you qualify for. It also depends on how you use your 401K plan. Not sure if you company has a 401K plan? Contact your Human Resources department to find out more.

Before You Retire

There will be times, however, when you need money before accessing the benefit provided by a 401K plan. If this is the case, consider getting a short term loan. Make sure you are borrowing from the best provider for you. Check out this article to help you understand how to go about choosing these types of loans You’ll want to contribute the maximum dollar amount that you can to your 401k plan considering some of the healthy employer matching policies available. That can leave you short on cash for your monthy bills. It’s good to have a lending resource to help you get past short term cash flow problems.