What is a 401(k) Plan?

The Wall Street Journal defines a 401(k) as "a retirement savings plan sponsored by an employer".

How do I get a 401(k) plan?

Most employers offer the option for employees to enroll in a 401(k). These plans take an allotted amount (usually a percentage) out of the enrolled individuals' paycheck before taxes are deducted, which contributes to the overall amount of one's plan. Majority of employers also match the amount that the employee takes out of their check for their plan as well. The allotted money used for the 401(k) may also take the form of a mutual fund, stock, or bond.

What are the types of 401(k) plans?

  • Traditional 401(k): A plan that takes the allotted money out before taxes. However, taxes on the amount in the plan are taken out upon the time of withdrawal. Traditional 401(k) plans also have an age limit for when the funds can be withdrawn, as well as a penalty fee for early withdrawal. 

  • Roth 401(k): The allotted amount is taken out of one's paycheck after taxes. However, an individual with a Roth 401(k) will not pay taxes on their plan upon withdrawal. This gives the individual more money to spend post-retirement. Though Roth 401(k)s are newer, they are becoming the more popular of the two plans.

How can I access the money in my plan?

Since a 401(k) serves the sole purpose of funding one's expenses post-retirement, most people do not access these funds until they are at the age of retirement. However, most people have the option of accessing and using a portion of these funds in case of an emergency. Some people may have to wait a certain amount of time before being able to pull funds from their plan, and most will have to face financial penalties when they do. 

401(k) plans are protected and monitored by the IRS. In the event that a company that a person with a 401(k) plan is employed by goes out of business, the plan will be terminated. However, the employee has the option to convert these funds into an Individual Retirement Account, or IRA.

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