401k: What is it?

A type of savings plan, a 401k is a long-term retirement solution designed to gradually accumulate money throughout one’s career. The name comes from the section of the laws set forth by the United States Internal Revenue allowing for this kind of option for financial planning. Typically, it is only possible to get a 401k through an employer as the money is removed from the paycheck every week or month and is subsequently put into an account.

The employee may choose exactly how much is removed from each paycheck in order to go toward the plan. This money will then be taken and invested into various funds like index-based stock funds, growth funds and money market funds, each of which will earn more value over time. The exact amount that an employee can reach prior to tax will vary each year, but the general cap on each year is about $16,000.

For the most part, 401k plans are effective and largely safe, though it is a financial plan that comes with its share of risk just as any other. If the investments are risky, then the value might not grow as fast as it should. In addition, these funds are not protected by the same corporation that safeguards other pension plans.

One major advantage of a 401k is the fact that most employers are willing to match what the employee contributes. For example, if an employee wants to take 10 percent of his salary every month and put it into the 401k plan, his employer may opt to match the dollar amount every time some amount is taken out of a paycheck. There is no obligation to match this, but nearly 80 percent of businesses will contribute to some degree.

There are also other advantages to a 401k; for example, they’re easy to understand and contribute to while others offer various options for investment. Many companies even let employees change how much they put towards the account at any time. It is also possible to borrow money on the account; the transaction doesn’t appear on a credit report, and the money can be used on anything.

Most participants find 401k plans to be a convenient means of saving for retirement. Though far from perfect, many consider it to be a very safe way to save for retirement compared to the other different risky options that are out there for employees.