A 401(k) plan helps workers save for retirement with a certain amount taken out of their paycheck for investment. Employers sponsor the plans and also make contributions. Here is some additional information to help you understand the plan.
The retirement accounts began replacing pension plans for many companies in the 1980s when 401(k) plans were introduced and named after the section in the tax code that oversees them.
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Employers found the plans were less expensive than pension plans because of escalating costs. Some jobs, particularly in the government, still offer pension plans.
The 401(k) investments often include mutual funds with a variety of stocks and bonds that offer diversity for secure investing. Target-date funds are a type of mutual funds that follow an employee over the years with changes that correlate with their age.
For example, younger workers might have some riskier stocks that offer faster and higher gains along with conservative investments for security. The funds begin to change as the worker ages with more conservative investments to protect the savings as retirement nears.
Matching funds work with the employee investing a certain percentage of his or her salary into the plan while the employer matches those contributions. Matching plans differ in each company. The 3 percent matching plan is among the most popular, according to The Wall Street Journal.
Workers put in 3 percent of their salary and the company matches it with 3 percent investments, but companies don't match beyond that percentage mark.
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Workers can contribute more to a 401(k) than they can with IRA plans, which are individual accounts separate from a company retirement plan, according to the IRS
. Many 401(k) plans offer options for workers to take out loans on their investments or withdrawal money for unexpected hardship.
The plans have advantages for employers and employees. Employer contributions are tax deductible. Employees benefit with tax deferred investing into the funds. Taxes are only applied during distributions from the funds. When people retire, they are often in a lower tax bracket as they begin to take distributions.
Traditional 401(k) plans have the option of employers making contributions for all employees or matching contributions. Safe harbor plans include employer contributions that are fully vested. Simple 401(k) plans are for small businesses to offer retirement benefits to their workers.
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