Understanding what is 401k and what benefits employees can have from this will help them a lot to plan for a comfortable retired life. It is a financial panning option meant for US employees useful for saving money for their retirement. The 401k plan can be taken only through an employer and the money is usually deducted from the salary. How much can be taken out of the paycheck is employee’s choice.
People invest money generally in:
• Money market funds
• Growth funds
• Index based stock funds
The amount that is deducted is pretax and the general contribution of the employee is about $16,000 per year. some types of retirement plans get protection from the ‘Pension Benefit Guarantee Corporation’. But the 401k plan doesn’t. Therefore there are risks involved with this plan as with any kind of investment plan. Depending on where your money is invested, it may or may not grow as we predict. In fact, There is every chance of losing money if not invested wisely.
The biggest benefit of 401k is the employer will match a percentage or all of the employee’s 401k contribution. This is called ‘401k match’. For example, if an employee contributes around 15% of his salary towards the 401k plan, the employer can match this with the 15% or less. It is estimated that at about 80% employers follow the same. This is taken as part of employee benefits and is one of the ways attract and retain good employees. The greatest advantage with 401k plan is that it does not attract any income tax until the funds are withdrawn from the account.
There are many benefits of the 401k plan: It is easy to comprehend and taken part in it; different investment options are offered to the employee, so he can choose to go with less risky investments; 401k plans are flexible in that they allow employees to increase or decrease the percentage of their contribution and also the type of investment they decide to put their money in. Hence, depending on other financial commitments, employees can decide to increase or decrease their contribution.
What is more, with the 401k plan, employees also have the advantage of borrowing for any emergency. This loan will not show up in a credit report and the money can be used for any purpose – medical emergencies, school fees, home repairs, repay mortgages etc. Just note that the loan will attract some charges and during the period when you are repaying the loan, the employer’s contribution will cease.
The rules regarding the 401k match will be decided at the time of hiring an employee and it will immediately come into effect. If you are lucky enough to join a company that offers 401k match, have your contribution as bigger as you can from your salary so that same amount will be matched by your employer. It will have a great effect as the more you contribute towards the 401k match, the greater will be the amount you will receive at the time of your retirement.
Since you have the right to choose your own investment program, take the help of a trusted financial adviser to select the best scheme. Make sure that the financial adviser has no links to your company so that he is not partial in his advice. Some companies may invest in some standard places which may not suit the employee. It is important to invest wisely in programs that offer safety as well as steady but not a spectacular growth which may lead to disaster.
Like any insurance policy, you must clearly mention who the nominee your 401k plan is in case of your untimely demise and there is still money in the account. The nominee’s name should be declared at the time the plan is started. Invariably the spouse will be the automatic beneficiary. Even if the couple is not together, the spouse still the beneficiary unless a waiver is signed. Children. Partners or a trust can also be the beneficiaries apart from the spouse. Though 401k is not 100 percent fool proof, it is very much a safe and steady investment plan for employees.
Article by David Livingston of EQuote, who is a specialist in everything life insurance. For more information on insurance life and low cost term life insurance, visit his site today.
