401(k) Basics

Why invest in a 401k plan

401(k) Contributions are pre-taxed which means your money is deducted to your account before taxes are applied. So in other words you don’t pay taxes while depositing the money into your 401(k) but taxes have to be paid when you withdraw from your account. Check with your company about the details, but most companies match their employee’s contribution to their 401(k). Essentially, your employer contributes money towards your retirement. The amount contributed by your employer depends on the policy adopted by the company. They may also have a clause stating you are entitled to their contributions only after you stay with the company for a particular period and put in a minimum number of hours of service. Some points to consider are: 1) Since the money is directly deducted from the source you don’t have to write checks or keep track of the deposits. 2) By not paying taxes while contributing to your 401(k) you actually save a considerable amount and summed up with the contributions made by your company you actually increase your take home pay. Even if the company you work for goes bankrupt the money in your 401(k) account is safe from liquidation. 3) A 401(k) plan allows you the option of retiring early. After retirement you can start withdrawing from your account at the age of 59½ whereas you can only access your social security at age 65.