The Benefits of 401k Plans

A 401k plan is a retirement plan, in which company employees save money for their retirement. This came about since social security cannot be the only source of income that retirees live on when they retire.

The 401k plan is administered by a company and both employees as well as the employers may contribute funds into the 401k plan. Employers are not however legally bound to match their employees’ contributions.

Apart from the reason why 401k plans exist, their biggest advantage is that the contributions that employees make into the plans come from pre-taxed income. Therefore contributors are not paying tax on the amount they save. The same goes for the interest. The interest earned on the contributions is not taxed, until that is, you take the money out – normally when you retire.

Even then, only the funds that you withdraw from the account will be liable to tax. However it is important to keep in mind, that since when you retire you will have less income, it follows that the tax rate that you will be paying on withdrawing the funds, will be lower than what you are paying now.

When the economy was working fine a few years ago, employers were commonly matching the contributions that their employees were making into their 401k plans. This meant that as an employee, you were getting a 100% mark-up, in the amount of money you were saving. Unfortunately though, since the economy has slipped into recession, these generous employer packages have become few and far between.

The fact is that, even without the employers matching your contributions, saving in a 401k plan is still worth it and will most definitely be an important factor in your future. So if your employer does offer this plan, don’t miss out!

Reference: http://greatgifts.mangacite.com/2009/03/28/a-401k-plan-benefits-you-in-many-ways/