401k Plans, What Are They
A 401k is one type of retirement plan which has become very popular in the past. What is this plan exactly? What is a 401k? It is a plan where employees can put a portion of their income into it and have it grow tax defered until they finally need to take it out for retirement.
The best part about the plan is definately the fact that it is tax defered. What that means is that any money which you put into the acount will be able to grow without being slowed down by Uncle Sam. That is a pretty big deal, especially when you consider how much taxes do affect your income.
Of course there are some disadvantages to this plan. There is a maximum you can put into a 401k. If you are making $200,000 a year the government doesn’t want you putting $150,000 into the plan and avoiding taxes on ¾ of your income.
There is also a minimum age you can withdraw. The 401k withdrawal rules say that if you take money out before the age of 59 ½ you must pay a 10% penalty on your money in addition to the taxes. This makes it hard to get money out early, but after all the plan is meant for retirement, so if would make sense that they would have rules against taking money out early.
There is a method that lets you get around this. You could always get out a 401k loan. That would allow you to get out some money from your account early without having to worry about paying either the early withdrawal penalty or taxes on your money.
The 401k loan rules do come with some disadvantages of their own. For instance many plans will not let you put more money into your account until you pay back the loan with interest, and if you can’t pay back the loan it may be counted as a withdraw and you would be forced to pay the taxes and any early withdrawal penalty as well.
401ks are just one of those vehicles that allow you to save up some money for retirement. They key to using it correctly is leaving the money in the plan for the long term and not tapping into it until you need to.
