401(k) Plans Explained

401(k) plans have been around since the late 1970s and have become an integral part of almost every single career known to man. However, there are many people that get bogged down in all of the details of what these plans actually are. If you are one of those people, you’re in luck! We’re going to break it down for you.

So what exactly is it? A 401(k) plan - named by its tax code section - is also known as a retirement plan; and it is exactly that. Essentially it’s a savings plan in which you invest a percentage of your money earned into a savings account for long-term use. Many employers match your 401(k) contributions up to a certain percent; this is why it can be so beneficial to start a retirement plan early in your career.

The money that is stored in your 401(k) account does not accrue taxes until after you withdraw it. However, at that point you should already be retired and have plans for your savings. Roth 401(k) plans are another variation of retirement plan that allow the employee to pay immediate income taxes on their contributions so that after they retire, taxes are not a factor in withdrawal of money.

These retirement plans took the place of pensions in the case of many corporate entities. Pensions were a steady income paid to the employee after their retirement from the company, 401k plans are more structured and predictable than a pension.

The best thing about 401(k) plans is they aren’t affected by the status of your company. That money remains untouched throughout the entire duration of your employment, no matter what.

If you haven’t already, you should start thinking about investing in a 401(k). It’s never too late and the earlier the better. The benefits of starting now will be so valuable in the long run. Think of it as an adult piggy bank; won’t it be fun to bust that one open?