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401Kafe
401(k) Defined |
401(k) plans are retirement
vehicles that allow employees to save for their own retirement. This type of plan was
named for section 401(k) of the Internal Revenue Code, which permits employees of
qualifying companies to set aside tax-deferred funds. We at 401k Forum are proud to have
the person who first developed the 401(k) plan, Ted Benna, as a member of our Board of
Directors. By making this change to the Code in 1978, the government opened the door for
more efficient retirement planning for all Americans. It's no exaggeration to say the
401(k) plan is the most important national retirement effort since Social Security was
introduced in the 1930s.
How It Works
The 401(k) mechanism is fairly simple. The plan is set up by your employer as a defined
contribution retirement arrangement. That means you are the one who pays into the
plan, although your employer and the plan provider who offers your 401(k) do just about
all the work.
Your 401(k) contribution is automatically deducted from your paycheck each pay period.
This money is taken out and invested before your paycheck is taxed. After you
have decided what percentage you want deducted from your check, and how you want to invest
it, your work is pretty much done.
Once the money is deducted from your paycheck, you can't spend it, but it is
yours. It grows in your personal 401(k) account. Although you can withdraw the money for
certain emergencies or in some cases borrow against your investment, the money is intended
to stay in your account until you are at least 59 1/2.
While the investment is growing in your 401(k) account, you do not pay any taxes on it.
When you withdraw the money at retirement, you pay taxes on the amount you withdraw from
your account (so you pay taxes little by little instead of being hit with one big bill).
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