DEFINITION.TODAY - Everyone will reach old age, unless he died when he was young. Therefore, people who are still productive now should prepare how they live in old age, especially preparing the most important source of livelihood - money. Although it's not everything to live on, but people talk about it everywhere - from home to work, from restaurant to highway, and from dining room to bedroom. And people probably still think about it when they are in the restroom.
One of the best solutions offered to Americans is the 401k (retirement) plan. Unfortunately, not everyone understands what it is and how to prepare it to the maximum. Either because they are not interested or they probably have not learned the basic concept of the 401k plan. How about you?
Well, if you wish, let's read the following scholars' perception and definition about 401k plans:
In other words, 401k plans are also mentioned as the most common way people are developing their retirement plans in America. It is even assumed as the best financial vehicle people should have because it offers deferred compensation along with potential matching (free money).
401K's are retirement plan accounts. According to Thomas Herold, it is not actually investments. They are specific purpose accounts that are funded using pre-taxed dollars taken out of people's payroll. [2]
Wealth can be built up for retirement then by purchasing assests in the plan that includes stocks, mutual funds, index funds, bond, and real estate investments trusts.
These accounts do not get taxed on dividends, capital gains, or interest earned within them until such gains are later withdrawn.
A 401K is a retirement plan with a defined contribution. The amount of money contributed is usually up to 15 percent of salary each month and will come out of paycheck before taxes. [3]
A 401k plan is an investment vehicle that a company offers its employees so they can begin to save for retirement. The money invested in a a 401k is tax-deferred and cannot be withdrawn without penalty until the employees get 59 1/2 years old. [4]
Some employers match a portion of their workers's monthly contribution.
By contributing to a 401K plan, people reduce their taxable income. Any earnings from investments in their 401K are tax deferred until retirement.
With a 401K plan, people can lend money from their account if there is an emergency. They will pay interest on the loan, but they are paying it to themselves. With a loan, they will not have to pay taxes on the money they borrowed.
If they take a hardship withdrawal, they will have to pay taxes on that money. If they withdraw money from their 401K before they reach 59.5 years old, they will have to pay tax and a 10% penalty fine to the IRS.
If they change employers, they have to make sure to roll their money from their 401K into a new 401K plan. The check has to be written directly to the new account.
For example, those who work for not for profits or government agencies are not eligible for standard 401K accounts. They are offered 403B plans instead.
The Roth 401K is another type of 401K plan. It allows workers to put taxed dollars into their account. While they do not permit contribution tax write offs now, they do ensure that income taxes will never have to be paid on any of the account money, including dividends and capital gains earned, when it is withdrawn for retirement.
Another type of 401K plan is the Self Employed 401K. This new type of 401K account is ideal for people who work for themselves. It includes a number of different features that make it very appealing to the owners of small businesses.
There are many advantages with a few restrictions to 401k plans, as follows:
Advantages:
- 401k contributions are on a pre-tax basis.
- Which increases your take home pay.
- And money is taxed at ordinary income.
But with restrictions (Disadvantages)
- On withdrawals before age 591/2
- You will pay a ordinary income tax.
- And with a 10% penalty on the gross amount.
The disadvantages are just the opposite. If you go on receiving checks as normal you'll pay more in taxes without lowering taxable income. Suppose you are paid $2,000 in gross income a week and taxed at 25%. Compare that to contributing 10% to 401k pre-tax:
Contributing to 401k
$2,000 x 10% = $200
$2,000 - $200 = $1,800
$1,800 x 25% = $450
$1,800 - $450 = $1,350
No 401k Contribution
$2,000 x 25% = $500
$2,000 - $500 = $1,500
The difference between the two is that without the 401 your paycheck is $150 more and over the course of 52 weeks this amounts to $ 7,800.
On the flipside, contributing to 401k would have accumulated $10,400. This $2,600 difference is the true advantage. Keep in mind that a 401k is for retirement and it is the best financial vehicle available.
If you are saving money somewhere else you will not be benefiting as much because all of that money invested would be coming from after tax income.
Sosial security may provide some relief but it won't be nearly enough or its system may change at some point.
Participating in 401k does not guarantee the retirement income that you need, but it is the first option you should look into.
Make sure at all costs, avoid withdrawing or taking out loans as the penalties are extreme and it just jeopardizes your future.
Overall, treat the 401k as a bill and forget about it. With moderate attention to your investments along increased contributions, you'll be surprised how well it adds up over time. In any case it is the best financial vehicle available to you.
Make sure that you understand the plan's provisions before you participate.
[1] I'm Not Flipping Burgers When I'm 70! By David Mulonas
[2] Financial Terms Dictionary: Terminology Plain and Simple Explained by Thomas Herold
[3] A Mom's Point Of View: Beginning Adulthood by Kimberly Kay Moreland
[4] Congratulations! You're Unemployed!~: A Complete Guide to Finding Your First Job Out of College by Michelle Abel
One of the best solutions offered to Americans is the 401k (retirement) plan. Unfortunately, not everyone understands what it is and how to prepare it to the maximum. Either because they are not interested or they probably have not learned the basic concept of the 401k plan. How about you?
Well, if you wish, let's read the following scholars' perception and definition about 401k plans:
What is a 401k (Retirement) plan?
David Mulonas defined 401k as an employer-sponsored retirement plan in which people deposit money directly from their paycheck and into specified investments as a source for retirement. [1]In other words, 401k plans are also mentioned as the most common way people are developing their retirement plans in America. It is even assumed as the best financial vehicle people should have because it offers deferred compensation along with potential matching (free money).
401K's are retirement plan accounts. According to Thomas Herold, it is not actually investments. They are specific purpose accounts that are funded using pre-taxed dollars taken out of people's payroll. [2]
Wealth can be built up for retirement then by purchasing assests in the plan that includes stocks, mutual funds, index funds, bond, and real estate investments trusts.
These accounts do not get taxed on dividends, capital gains, or interest earned within them until such gains are later withdrawn.
A 401K is a retirement plan with a defined contribution. The amount of money contributed is usually up to 15 percent of salary each month and will come out of paycheck before taxes. [3]
A 401k plan is an investment vehicle that a company offers its employees so they can begin to save for retirement. The money invested in a a 401k is tax-deferred and cannot be withdrawn without penalty until the employees get 59 1/2 years old. [4]
Some employers match a portion of their workers's monthly contribution.
 |
| 401k Plan Definition - What is a 401k Plan? |
By contributing to a 401K plan, people reduce their taxable income. Any earnings from investments in their 401K are tax deferred until retirement.
With a 401K plan, people can lend money from their account if there is an emergency. They will pay interest on the loan, but they are paying it to themselves. With a loan, they will not have to pay taxes on the money they borrowed.
If they take a hardship withdrawal, they will have to pay taxes on that money. If they withdraw money from their 401K before they reach 59.5 years old, they will have to pay tax and a 10% penalty fine to the IRS.
If they change employers, they have to make sure to roll their money from their 401K into a new 401K plan. The check has to be written directly to the new account.
Types of 401K Plans
A number of different types of 401K plans exist. All of them have their own spesific purposes, drawbacks, and benefits.
For example, those who work for not for profits or government agencies are not eligible for standard 401K accounts. They are offered 403B plans instead.
The Roth 401K is another type of 401K plan. It allows workers to put taxed dollars into their account. While they do not permit contribution tax write offs now, they do ensure that income taxes will never have to be paid on any of the account money, including dividends and capital gains earned, when it is withdrawn for retirement.
Another type of 401K plan is the Self Employed 401K. This new type of 401K account is ideal for people who work for themselves. It includes a number of different features that make it very appealing to the owners of small businesses.
Advantages and Disadvantages
401k plan is a pretty simple investment strategy and it's the best financial vehicle that you probably will ever have.There are many advantages with a few restrictions to 401k plans, as follows:
Advantages:
- 401k contributions are on a pre-tax basis.
- Which increases your take home pay.
- And money is taxed at ordinary income.
But with restrictions (Disadvantages)
- On withdrawals before age 591/2
- You will pay a ordinary income tax.
- And with a 10% penalty on the gross amount.
The disadvantages are just the opposite. If you go on receiving checks as normal you'll pay more in taxes without lowering taxable income. Suppose you are paid $2,000 in gross income a week and taxed at 25%. Compare that to contributing 10% to 401k pre-tax:
Contributing to 401k
$2,000 x 10% = $200
$2,000 - $200 = $1,800
$1,800 x 25% = $450
$1,800 - $450 = $1,350
No 401k Contribution
$2,000 x 25% = $500
$2,000 - $500 = $1,500
The difference between the two is that without the 401 your paycheck is $150 more and over the course of 52 weeks this amounts to $ 7,800.
On the flipside, contributing to 401k would have accumulated $10,400. This $2,600 difference is the true advantage. Keep in mind that a 401k is for retirement and it is the best financial vehicle available.
If you are saving money somewhere else you will not be benefiting as much because all of that money invested would be coming from after tax income.
Conclusion
It is imperative that you participate in 401k if it is available, as you have to rely on yourself for retirement.Sosial security may provide some relief but it won't be nearly enough or its system may change at some point.
Participating in 401k does not guarantee the retirement income that you need, but it is the first option you should look into.
Make sure at all costs, avoid withdrawing or taking out loans as the penalties are extreme and it just jeopardizes your future.
Overall, treat the 401k as a bill and forget about it. With moderate attention to your investments along increased contributions, you'll be surprised how well it adds up over time. In any case it is the best financial vehicle available to you.
Make sure that you understand the plan's provisions before you participate.
Bibliography
For more information about 401k Plan, I recommend yout to read in detail on the following books entitled:[1] I'm Not Flipping Burgers When I'm 70! By David Mulonas
[2] Financial Terms Dictionary: Terminology Plain and Simple Explained by Thomas Herold
[3] A Mom's Point Of View: Beginning Adulthood by Kimberly Kay Moreland
[4] Congratulations! You're Unemployed!~: A Complete Guide to Finding Your First Job Out of College by Michelle Abel
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