How does a 401k plan work?

Question

Im going to graduate and start working soon, and I dont know if to go with a 401k or an IRA because I do not know much about a 401k plan.

Answer 1

A 401(k) plan is a company-sponsored qualified retirement plan for employees. Contributions and earnings in a 401(k) plan are not subject to federal and most state income taxes until the funds are withdrawn. A 401(k) plan allows you to save money on a pretax basis, and most employers will contribute matching funds to make the plan even more lucrative. Usually you will have the option to decide how much you contribute (up to the maximum allowed by the government) and where you will invest your contributions (from a list of funds provided by your plan sponsor).

Once you are eligible to start participating in your company’s 401k plan, you will be given a list of funds in which you can invest. You can invest a maximum of $14,000 in your 401(k) plan in 2005 and $15,000 in 2006. If you are over the age of 50, there is a catch-up amount you can invest in addition to the maximum for each year.

Your contributions will be deducted from your paycheck before taxes are withheld.



If you’re lucky enough to work for a company that provides the benefit of a company match, it’s like earning free money. Enroll in your employer’s 401(k) plan, and then contribute enough to earn your employer’s maximum matching 401(k) contribution. Like I said, it’s free money!

Before your 401(k) plan money earns the first dollar of interest, you’ve already had a 100 percent growth if your employer matches you dollar-for-dollar. Even if the match is only 50 cents on the dollar, that’s still an instant 50 percent growth, guaranteed! You can’t get that kind of growth anywhere else.

Each company has a vesting schedule, and it is to your benefit to understand exactly when you will become vested. The vesting schedule outlines how much of the company matching contributions and earnings on those contributions you own at any given time. If you leave the company before you are fully vested, you will lose some of the money in your plan.

Answer 2

This is a debated question and it depends on a number of factors. A pension would typically be better if their is no 401k match at the company because if your company did not offer a 401k then you could still start an IRA and have the best of both worlds. a pension and an investment plan. Now if there is a company match depending on the dollar amount of the pension a matching 401k for a young guy with decent funds available would have way more potential thus would be better than a pension. One nice thing about 401k's is you can retire at 59.5 and withdraw without penalty it also can be passed down to your kids upon death and not just to spouse like a pension. Also most pensions make you wait till 67 to collect the full benefit if you retire at 62 you will only receive 80% of the pension benefit. if you have a major expense or want to make a major purchase and rely on a pension only your monthly income is fixed with a 401k you could just withdraw the amount. So as you can see they both have benefits pensions are gauranteed monthly payouts in retirement. 401k's have more potential and more lenience. but in reality a pension and a individual retirement account in retirement would kick some major a s s Not to mention most people can afford to put away a few percent in a 401k that is all it takes.

Answer 3

Agreeing with the answers above but with 1 addition,
After you contribute to the maximum amount of employer matching in the 401k, you may want to contribute to a Roth IRA before continuing with the 401k (the unmatched amounts).

This is because earnings can be taken out of a Roth IRA tax free upon retirement and by that time, you'll probably be at a higher tax bracket.

Answer 4

A 401k plan is a differrd savings/tax program. The main benefits are 1) Your contribution is pre-tax, so the amount you contribute annually is NOT reported as taxable income! You pay taxes on it when you withdraw money from it after retirement. 2) Employeers often provide a full or partial matching amount. This ammount may be immediately yours, or may require a vesting period depending on your employeer. But this only applies to the money that they contribute, not to the funds that you contribute. For example, let's say I make $50,000.00 a year. I want to contribute $1,000.00 a month to my 401 K for a total of $12,000.00 year. My generous company matches my contribution with a 10% contribution of their own which is fully vested in 5 years, vesting at a rate of 20% per year. That means that my 1040 income for the year will be $38,000.00. My employeer will have contributed $1,200.00 of which $240.00 will be vested (mine) after the first year. But most important !!!! unfortunately I did not start saving for my retirement until most of my work life had ended ... please start now or you will live to regret it!!! For best results, check with your accountant or tax preparer if you have on to find out which option is the best for you. Usually, if the employeer has a matching, then this would be the best bet.

Answer 5

A few advantages to 401K'S exist, but its traditional selling point is that you may pay your investments' gains tax when your age places you in a lower tax bracket. However, some 401K'S grew to such size through the 80's and 90's that investors did not care about waiting until age 70 and 1/2 (as was my father's case). My father, though, spent $400,000 US in four years at Native American casinos, and now he only has his pension on which to rely (thank God that he was a career firefighter).

OTBPOC

Answer 6

The answer from Elvis 53 is right on. You cannot participate in your companies 401K plan until you are employed for one year and one day. If you are single, even if you contribute say, 1 or 2 %, this is deducted from your gross. Thus, your tax burden is reduced.

Answer 7

you won't loose money with an IRA, you can with a 401K

Answer 8

Try searching the internet for it

Answer 9

WELL BASICALLY U GET SOME STOCK IN THE COMPANY

Answer 10

not too good for most people