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When it comes to saving for retirement, there are lots of different ways that people are making this happen. For those folks who want to be able to live comfortably when they get to old age, putting away money and making it grow is an absolute must. Among those plans for retirement, many people like to go with one of the variations of the 401k plan. There are many reasons why this plan is a good idea for those who want to save, and most of them have to do with the favorable tax exemptions that go along with these plans. So what do you need to know about this particular type of investment product?

What are the 401k contribution limits for 2010?

Under the current system, participants can only contribute a total of $16,500 to these investment plans. That is the limit for those under 50 years of age, and it applies to contributions made to both the traditional 401k and the Roth 401k. For those over the age of 50, an additional $5,500 contribution can be made.

What are the 401k withdrawal limits for 2010?

As long as you are 59 1/2 or older, you can withdraw as much of your 401k as you would like, but be careful! The amounts that you withdraw are taxable. So, it is recommended to only withdraw the amount that you need for that tax year. You don't want to put yourself into a higher income tax bracket.

How does a 401k plan work?

The traditional plan is one that can either be acquired through an employer or if you are a self-employed individual, it can be set up through a broker. When these plans are set up by an employer, part of your salary will be deposited into the account in most cases. This is known as a contribution, and many people set up their package to allow for automatic contributions to the overall account. In some cases, employers will sweeten the pot for employees by matching part of this contribution or all of this contribution, depending upon how many benefits they want to give out.

Breaking down the tax advantages

If these plans are so popular, then there has to be a reason for that, right? In the case of the traditional contribution plan, the reason is that they offer significant tax advantages over other investment products or saving your money alone. This is the government's way of encouraging people to save and invest their money, and the tax benefits were instituted in order to promote investment in the markets. This works out for everyone involved, especially those who hold these accounts. The contributions to a 401k plan are not subject to federal income tax withholding until they are withdrawn down the road.

What is the practical implication of these tax breaks?

If you are thinking about throwing money into a 401k plan, then you probably want to know, on a more practical level, how they are going to benefit you for the long run. When we talk about the tax advantages, we know that the money you contribute into your plan is not taxed immediately. This means that it has a chance to grow and accumulate interest over time. You will eventually have to pay taxes on the money when you take it out of your account down the road, but you can really make some additional money by earning interest on the contributions before they are taxed. This is the primary reason why the 401k is one of the most popular investment plans on earth.

Are my earnings taxed in these plans?

This is where we get into the fun part of these plans. If you are saving for the long haul, then you want a plan that gives you the absolute peak earning potential. That is what 401k plans offer, because your earnings in these plans cannot be taxed. This exemption from capital gains tax is key and it can really power your ability to save money over time. That means that the dividends, capital gains, and interest gained from these events cannot be taxed. With the compound interest working in your favor, this can mean thousands of dollars worth of savings over time. It's a huge benefit over just investing your money into the market, where all of your gains are taxable.

Who directs these 401k plans?

In most cases, these are retirement plans that are completely self directed. People get to make their own choices with where the money goes, and that makes them an even more attractive choice. People typically choose from some of the safest investment products on the market when allocating their plan. They aren't investing in volatile stocks, for the most part. Instead, they will choose from a mix of stocks, bonds, and mutual funds that are presented to them. The idea behind this type of account is slow, continuous growth and minimizing risk.

Who handles and directs 401k plans?

These days, you can have your self-directed retirement plan handled by a number of different financial companies. Almost all of the major companies out there have 401k management, and they are happy to provide investors with several choices for investing their money. They will typically make suggestions and allow you the ultimate decision, or you can make the choice to put all the power in their hands. It depends on how much you know about the markets and how willing you are to trust your retirement money in someone else's hands.

What is a Roth 401k plan?

This is different type of investment plan that combines some of the best parts of the straight 401(k) and the Roth IRA. This allows individuals to make addition after-tax contributions, and have the gains from the account taken out on a tax-free basis. This type of plan is one of the new available products, and it adds just one more way for investors to get the most out of their money for the future.

Taking full advantage of the plans

These are things that the government has set up to help out consumers. You don't have to be a genius to know that you absolutely should be contributing the maximum amount of money to these types of plans if you want to be successful saving for the future. It is completely advantageous and to not do so would be counter-productive to any serious investment plan.