The 5 Ws of the 401(k) Plan

Any person who is an employee in the US should know about the 401(k) plan. It is empirical to have a fruitful life even after your working life. Here is everything you need to know about it.

What is the 401(k) Plan?

The 401(k) Plan is essentially a retirement plan provided, and sometimes matched, by employers in the United States. It was named after the Internal Revenue Codes’ subsection 401(k) which specifies the need for employees to have a tax-qualified and defined-contribution pension account. This means employees are automatically deducted a certain amount from their payslip pre-tax which is set aside for the employees to claim upon a certain amount of time. What’s more is that you have the option to control what you want to invest in. You can choose bonds, stocks, mutual funds, etc. The 401(k) investments’ earnings will only be taxed when you withdraw it which is generally during the time that you retire.

Where can you get a 401(k) Plan?

It is provided by your employers and which they sometimes match.

When can you get a 401(k) Plan?

Ideally, you should withdraw the funds accumulated in your 401(k) investments after you retire, specifically at age fifty nine and a half and mandatory withdrawals starting at age seventy and a half. However, there are situations in which you may access the funds pre-retirement period. This, however, will incur charges which will include a 10% penalty for the withdrawing the fund early plus the regular income tax that is normal for withdrawals. You can bypass this withdrawal penalty, however, if you fall under a category which specifies that the withdrawal was made due to “hardship” such as sudden disability, medical expenses, etc. This is rarely granted though so be prepared.

Who can get a 401(k) Plan?

Anyone who is an employee should be able to get one. Even if you are self-employed, you can avail of the Solo 401(k).

How does the 401(k) Plan work?

Fixing your 401(k) plan is simple. You accept the provided plan of the employer and then you decide on the following things: the amount or percentage of contribution you want to invest and what investments it will carry. The employer will then input the data and automatically deduct the amount from your payroll and invest it on your account on your behalf to an investment firm which may be an insurance company, a brokerage firm, or a mutual fund company.