Last year alone, professionals contributed $755.4 billion to their retirement funds. Contributing to a 401k is easier than ever.
If you have ever been curious about how does a 401k work, we have the answer for you. Their popularity has continued to rise among young and old professionals seeking to save for retirement.
Here we take a look at the details of what is a 401k so that you can be a more informed employee to make the most of your retirement plan. If you are unsure if you should contribute, keep reading to find out more about 401k plans.
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Planning for Retirement
It’s no secret that retirement is expensive. After all, you’ll still have all the same expenses you had while working. And yet most people are forced to live on a fraction of their working-life income.
The key is to start saving and preparing as early as possible so that you can be financially secure when retirement age finally arrives. Fortunately, many employers offer 401K plans that make saving for retirement much easier.
401Ks and You: An Introduction
So, first of all, we should start by defining what is a 401K.
In the most basic terms, this is a type of retirement plan offered by employers to help employees delay tax on earned income.
When an employee signs up for a 401K plan, they agree to contribute a specific percentage of their paycheck into the investment account. This is great because the amount invested in the 401K won’t be taxed until it’s withdrawn.
How a 401K Works
The process is incredibly simple.
First, you sign up for a 401K plan through your employer. Next, you contribute pre-tax money from your paycheck every pay period.
The funds contained in your 401K are invested in your underlying portfolio, and once you’ve reached the age of 59.5, you can begin withdrawing funds to use as retirement income.
The Benefits of a 401K
Now let’s look at the primary benefits of contributing a percentage of your paycheck to a 401K account.
For starters, employers can match each of your contributions to the retirement plan. Keep in mind that this is free money.
Your 401K plan is protected under ERISA, which is a federal law that protects money saved in retirement plans.
You can also currently contribute up to $19,500 to your 401K each year, plus an additional $6,500 for people over 50 years of age.
You can learn more here about making withdrawals from your 401K.
An Employee’s Guide to How Does a 401K Work
It’s never too early to start planning for retirement. The key is to take advantage of every resource available for building wealth for your golden years. Fortunately, this guide to how does a 401K work will help.
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