What Is The Purpose Of A 401k Plan ?

What Is The Purpose Of A 401k Plan ?

A 401K plan is a qualified beneficial retirement savings plan which allows employees working for a private company or a corporation to save for life post retirement. It is like setting up a personal pension account for life after retirement and gathering adequate funds to live a salary-free life during the old age.

The concept of how this works is pretty simple. A 401K plan is set up by an employer on the day of joining the organization or after a certain timeframe of serving the firm. You can opt for automatic enrollment for the plan or authorize the employer to deduct a certain contribution every month from your wages and contribute from your side for the 401K plan. Your employer also contributes a certain percentage called matching contribution and this is additional saving benefits for your 401K plan. Since the interest is compounded yearly for your contributions, the benefits you get during your post-retirement lifetimes are enormous.

The funds contributed by you and your employer grow in a tax-deferred environment. This means that when you cross the age of 59.5 years and withdraw funds, you pay the regular tax of that year for the funds you withdraw. For any early withdrawals, you would be charged an additional penalty of 10 percent. Hence, before you enter into a financial contribution commitment to this plan, you need to be careful as early withdrawals can result in unnecessary penalties and financial loss.

Though the 401K plans have a basic structure, it varies between organizations as there is some flexibility in administering the plans by the employer (e.g. vesting period).

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What Is The Purpose Of A 401k Plan ?
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