What Is a 401k?

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What Is a 401k?

With so many ways to put money aside for your retirement, it’s important to think them all through. Fortunately, one method is as common as it is easy. Here’s what you need to know about a 401k.

There can be a couple of distinguishing characteristics about a 401k, but the main one is that it’s a savings plan, geared for retirement, that is sponsored by your employer. The other major component is that it allows individuals to take money out of their paycheck and have it put away for retirement, without having taxes deducted. Taxes will only be paid later on when the money is withdrawn.

These plans were originally introduced in the 1980s as a way to help people with their retirements as pensions became too expensive for most employers to support. They’re named after the section of the tax code that covers how they operate.

One of the nicest parts about having a 401k through your employer is that they generally hire a third party to administer or look after it. This third party, then, sends you important information about your account throughout the year. So it’s a lot like having a private broker in that you’re constantly kept in the loop and educated about your options.

Most companies will also match the amount you put in, up to a certain point. How much you invest is up to you and will depend a lot on your other expenses. However, you should always try to invest enough to meet the max your company will match. Otherwise, you’re leaving free money on the table.

Every company’s 401ks are a bit different and there is plenty more to consider when it comes to withdrawing your funds. But the important takeaway is that a 401k is an important and easy way to save for retirement due in large part to the fact that your company will help.



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