Defining A 401K

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There’s no greater financial safety net than Social Security. Regardless of it’s faults, every year it helps hundreds of thousands retired people to thrive in their retirement years. But the Social Security program was never meant to be the only income source for retire people. In fact, that’s why the 401k plan was created. It was a greate means for the federal government to entice workers to save money for their retirement years by providing them with financial incentives to do so.

So, what is 401k plan? A 401k program is a retirement investment plan available to employees of companies. The company administrates the plan but employer and employee both are allowed to add funds to the plan. The all important, and huge, reward of a 401k plan is that you are able to invest using pre-tax dollars.

What this means is that the money that you set aside for the 401k is invested into the plan prior to it being taxed. Also, the monies are able to persistently earn tax-free interest on your contributions until you take out the money - which you will normally not do until you retire. But even then, only the monies that you remove from the fund are taxed. Since, presumably, you’ll be at a lower income level when you retire, the net amount of money that you will be taxed will be lower as well.

Some employers entice workers to join their company by touting their generous 401k packages. In better economic times, it was not unusual for a company to match the employee’s contribution with an equal amount of their own. So if you contributed $100 to your 401k plan, they would kick in another $100, in effect giving you a 100% gain on your money even before your investments kicked in. In the current recessionary economy, however, those generous packages have become harder to come by. But even without that perk, if a 401k plan is offered by your employer, you should definitely take advantage of it. When you retire, you’ll be glad you did.

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