401(k) Plan: Understand Your Retirement Benefits

When you are contemplating on retiring, you would find yourself more comfortable and at ease when you have saved up for yourself enough money to provide you with funds that you can spend once you have decided to stop working and enjoy the rest of your life.

It is important for everyone to at least have a plan of preparing for retirement by saving a part of their earnings during their working life for their retirement fund. One of the best ways to amass such a retirement fund is by getting a 401(k) Plan.

A 401(k) is a type of retirement plan that allows people working for others to save a part of their earnings and invest it for their retirement. With a 401(k) Plan, employees like yourself can have employers deduct a certain amount of money from your salary and have it invested in the said plan.

This money can then be invested in a number of ways, ones that are usually being offered in your own company’s 401(k) plan. This plan has been established with certain tax privileges in order to encourage more people to save up for retirement.

A 401(k) Plan provides a better option to save your money into than having it placed in mutual funds or in a savings account. In an ordinary savings account, the money you saved has already been taxed and the earnings it gains are also taxed annually. Whereas in a 401(k) Plan, the money that you set aside for it is taken from your salary before taxes, making your taxable income smaller and therefore you pay less taxes.

Not only that, the money you set aside as your contribution for your 401(k) Plan is not taxed along with its earnings, just as long as you keep it intact or up until you decide to take it out. This tax deferment benefit allows your money saved in the 401(k) Plan to gain even more through the power of compounding since they are kept in the plan tax-free.

With a 401(k) Plan, the employee decides how much money is to be allocated for the said plan from one’s salary on a regular basis. This amount is invested in the plan every pay period up to a legal maximum amount that is set by the IRS for each year. The employee also has the authority on how to invest the money as the way he or she sees fit, choosing from the options made available by his or her company.

What makes a 401(k) Plan even more attractive is that your funds are protected even if your company goes bankrupt. This is because the funds that form part of the company’s 401(k) Plan is held in a separate trust and would not be considered as an asset. So in case your company goes bankrupt, your plan money would not be used to pay off company debts as the employer does not have access to it for any other purpose related to keeping the business afloat.

 

Posted by Ardent Editor on Oct 3 2007 in 401k & Company Plans

  • Sponsors