The naming of 401K retirement plans is based on the relevant section of the tax code that governs the plans. The system was first introduced in the 1980s as a supplement to the already existent pension funds. It is a method of saving for retirement, which is sponsored by a worker's employer.
In earlier days, employers used to offer their employees suitable pension funds. These funds were usually managed by the employment company from which a steady amount was paid out during the course of retirement. Employees of government departments and unions may still have the option of a pension fund. The costs of maintaining this type of scheme are what have made employers move to 401K plans.
401K plans allow workers the facility to invest a part of their earnings before taxation. Taxation is only applied upon withdrawal of the funds from the plan. The worker is able to choose the investment aspect of the money they wish to invest. Target-date funds are one of the most popular options to choose. This option comprises of a blend of bonds and stocks that normally leans toward the more conservative when the worker's retirement age is reached.
The benefits linked to 401K retirement plans are plentiful. The main advantage is the one linked to taxation. The available funds are not taxed before investment as taxes are levied on the capital gains, dividends and interest upon withdrawal of the funds. During this investment period, you are offered the benefit of compounding the gains on the account. This can make your final package quite large if you opt to invest in this type of plan at a young age.
Another benefit is that your employer usually contributes a certain amount to your plan as well. The rates may vary, but there are employers who are prepared to match an amount of 6% of your salary to your fund.
An added benefit of this type of plan is that you have the option to transfer your package when you change jobs. You could also choose to leave your funds in your previous employer's plan, but should be aware that this may cost you in the form of fees. The option you have is to roll over the amount from your past employer's plan to your new employer's plan. This may only be possible if you already have a new job prior to leaving your existing job.
Your choice of whether to arrange a rollover or not is dependent on the options available to you with the new plan you are offered. You could choose to rollover the funds to an IRA if you do not like the current available options. You also have the option to withdraw the funds already invested from your current plan. This will attract a penalty fee, as well as taxation.
There are many options available to 401K retirement plans and how you invest your money. The options available to you when you leave your current employer should be considered carefully. Your only target should be to retain as much of the funds as possible and to re-invest it in a plan that matches your retirement aims.
In earlier days, employers used to offer their employees suitable pension funds. These funds were usually managed by the employment company from which a steady amount was paid out during the course of retirement. Employees of government departments and unions may still have the option of a pension fund. The costs of maintaining this type of scheme are what have made employers move to 401K plans.
401K plans allow workers the facility to invest a part of their earnings before taxation. Taxation is only applied upon withdrawal of the funds from the plan. The worker is able to choose the investment aspect of the money they wish to invest. Target-date funds are one of the most popular options to choose. This option comprises of a blend of bonds and stocks that normally leans toward the more conservative when the worker's retirement age is reached.
The benefits linked to 401K retirement plans are plentiful. The main advantage is the one linked to taxation. The available funds are not taxed before investment as taxes are levied on the capital gains, dividends and interest upon withdrawal of the funds. During this investment period, you are offered the benefit of compounding the gains on the account. This can make your final package quite large if you opt to invest in this type of plan at a young age.
Another benefit is that your employer usually contributes a certain amount to your plan as well. The rates may vary, but there are employers who are prepared to match an amount of 6% of your salary to your fund.
An added benefit of this type of plan is that you have the option to transfer your package when you change jobs. You could also choose to leave your funds in your previous employer's plan, but should be aware that this may cost you in the form of fees. The option you have is to roll over the amount from your past employer's plan to your new employer's plan. This may only be possible if you already have a new job prior to leaving your existing job.
Your choice of whether to arrange a rollover or not is dependent on the options available to you with the new plan you are offered. You could choose to rollover the funds to an IRA if you do not like the current available options. You also have the option to withdraw the funds already invested from your current plan. This will attract a penalty fee, as well as taxation.
There are many options available to 401K retirement plans and how you invest your money. The options available to you when you leave your current employer should be considered carefully. Your only target should be to retain as much of the funds as possible and to re-invest it in a plan that matches your retirement aims.
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