Author: Archer-Blog

What is a 401(k) plan? What is a 401(k) plan? A 401(k) plan is a type of retirement savings plan available to employees in the US that offers tax benefits. It is called so because of the section of the US Internal Revenue Code that governs it. When an employee enrolls in a 401(k) plan, a portion of their salary is automatically deposited into an investment account before taxes are deducted.penalties for early 401k withdrawal . The employer may choose to match some or all of the contribution. The employee gets the freedom to choose from a range of investment options, typically mutual funds. Understanding 401(k) plans The United States Congress created the 401(k) plan to promote retirement savings among Americans. These plans provide tax benefits and there are two options available, each with unique tax advantages. Traditional 401(k) A traditional 401(k) allows employees to contribute a portion of their pre-tax income. This reduces their taxable income for the year and can be reported as a tax deduction. The contributions and investment earnings are only taxed when the money is withdrawn, typically during retirement. Roth 401(k) A Roth 401(k) means that you make contributions with money that has already been taxed, so you won't get a tax deduction when you contribute. However, when you withdraw the money in retirement, you won't have to pay taxes on it again, including the earnings it has accumulated over time. This is enormous. Speak with your accountant! Although Roth 401(k) contributions are made with after-tax money, taking out the money before the age of 59 1/2 can result in taxes. It is important to consult an accountant or qualified financial advisor before withdrawing from a Roth or Traditional 401(k).