Understand 401k Retirement Plans

In the United States of America the so-called 401k retirement plans are the most popular plans around. And for good reason.

The rather strange sounding name refers to a section in the US Internal Revenue Code: Section 401 Paragraph k.

Plans based on this reference of the US Internal Revenue Code became generally known as 401k Retirement Plans.

In short a 401k Plan is a defined contribution plan that permits you as an employee to have a portion of your salary deducted from your paycheck and contributed to an account. Your employer may also make contributions to this account.

Tax on your, as well as your employer's, contributions plus the income earned on the account is deferred until your retirement.

Your employer's contribution is effectively free money. You get a lower taxable income and your savings and earnings accumulate for your retirement untaxed.

These Retirement Plans are often used by employers as a vehicle for a profit sharing incentive plan.

The Internal Revenue Service sets a maximum amount you can contribute annually to your 401k plan. The smart thing to do is to contribute as much as you can within the limits allowed.

401k Plans make provision for 'rollover' when you change your employer. That means you can move your assets from your old 401k plan to your new 401k plan. Or even to an Individual Retirement Account.

You decide how your money is invested inside your retirement plan. The smart thing is to diversify your investment spread and to remain cautious and conservative rather than aggressive.

Your 401k plan is only one component of your comprehensive retirement plan. Do consider a retirement income planner in your research and choose a retirement calculator by visiting these pages on our Web site.

However, you cannot rely on these tools entirely for your retirement planning decisions. You'll need a qualified advisor for that.

401k Plans are for employees of private companies in the United States of America. For employees of educational institutions, churches, public hospitals and certain nonprofit organizations please refer to 403b retirement plans. For state or local government employees please refer to 457 retirement plans.

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