Many employees are hard working individuals looking forward to their golden years of retirement. Although the term 401(k) is extremely familiar to hundreds of thousands of workers all over the country, very few take full advantage of it and even fewer fully understand what it is. At its most basic level, a 401(k) is a tax shelter for retirement savings. While most comprehend this, few understand the full potential of it and how it can make your golden years your best yet. This is why the following list of common questions about a 401(k) has been assembled.
What Is A 401(k) Plan?
A 401(k) plan is a tax-advantaged retirement plan some employers offer their employees. One of its advantages is being able to contribute money to a plan with before-tax dollars that can then be used to purchase a select number of securities defined by your particular plan. The idea is an individual contributes throughout their entire career so when it comes time to retire, there is enough in the account to do so comfortably. This is largely based on the securities within your particular plan appreciating over time. Because retirement is usually thirty-five to forty years away for most first time 401(k) holders, there is plenty of time for these assets to appreciate and gain in value. A 401(k) plan is different from regular investments because regular investments can be taxed in the year interest or capital gains are realized. A 401(k), on the other hand, delays the payment of tax many decades down the road. It is important to note a 401(k) is not mandatory, though it is usually in someone's best financial interest to do so.
Continue reading to learn about investment selection in a 401(k).