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What Is The Basic Structure Of A 401K Plan?

A 401k plan is defined as a retirement plan started for you by the company that you work for. It consists of you authorizing your employer to take pre-tax earnings from your paycheck to invest it in funds that your company offers in their 401k plan. Every employer offers a different type of plan for 401k. It is important to familiarize yourself with your company’s plan before signing up for any retirement plan.

Advantages of a 401k Plan

There are several pros to the idea of 401k retirement plans. First and foremost you will be able to decide how much, whether it is a percentage or a specific dollar amount, will be taken out of your paychecks. Some companies will even match the amount that you put into your 401k each month. The money that is taken out of your paycheck is not taxed, therefore decreasing your taxable income. Another advantage of a 401k is that the money is taken automatically and all that you have to do is authorize the amount. If you leave an employer your 401k plan can be kept at your former company plan, transferred to your new company, turned into an individual retirement account, or taken out as cash to pay the taxes and penalties. Some employer’s packages might include other benefits but these are the most common benefits of a 401k plan.

Disadvantages of a 401k Plan

The disadvantages of a 401k plan are few but can be damaging in some situations. The most notable disadvantage is that you cannot withdraw until the age of 59 and a half. If you withdraw before this time you will have to pay all of the stiff penalties that you will incur. The amount that you put in each year is capped by the government and you are also limited to where your investments go. You will have to choose the funds that your employer offers in their package.

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What Is The Basic Structure Of A 401K Plan?

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