What is a 401k account?

Answer 1

1. A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren't paid until the money is withdrawn from the account.

Answer 2

Having enough money for retirement is a growing concern for many Americans. With the uncertain future of Social Security and the increases in costs of living, many of our senior population will not have basic living expenses without supplement retirement income. A 401k account is one way for an individual or couple to save for their retirement.

The 401k account is a retirement fund most often sponsored by an employer. This fund is frequently part of a benefit package, and the employer may match all or some of the employee’s investment. Employees can choose from a number of investment options, ranging from very low risk to highly speculative. It is recommended that a balance between solid investments and higher risk investments is chosen.

Some of the assets in 401k account plans may be tax deferred. As of January 1, 2006, there are now two options for 401k plans, the standard plan and the Roth 401k accounts. Prior to 2006, all 401k were considered pre-tax, meaning no taxes were withheld from the contribution. With the advent of the Roth 401k, consumers have the option to invest in an account where tax is withheld and then not taxed at withdrawal or retirement.

While still employed by the sponsoring company, there may be significant penalties on withdrawals from the plan prior to age 60. In a standard 401k account, any withdrawal is subject to tax. Frequently, an employee can only withdraw from the plan prior to retirement age because of financial hardship, such as medical expenses, permanent disability, or to prevent loss or Foreclosure of a primary residence. If an employee leaves a job where they have an employer sponsored 401k account the account generally remains active for the rest of their life, however withdrawals must begin April 1 of the calendar year the employee turns 71.

In addition to the standard 401k plan and the Roth 401k plan, there is also a Safe Harbor 401k plan where all employer contributions are fully vested when that the contributions are made. The safe harbor plans are exempt from the annual nondiscrimination tests. Regardless of the type of 401k account plan you have access to, it is always wise to invest in your retirement. If at all possible do not touch your retirement money until you are of age to retire.