401(K) Plan

A 401(K) plan is a retirement savings plan used in the United States. The United States Congress created it in 1978 as part of the Tax Reform Act, as a means to encourage people to save.

What makes the 401(K) plan a very good sound savings and investment plan are the following features:

• Automatic deduction from salary. Monthly contributions, determined by the employee, automatically go into the 401(K) plan. This means that there is no chance to spend the money on things that are not really needed.

• Tax deductible. The amount contributed to the plan is deducted before taxes. This means that the portion of money you put into the plan would have gone to taxes but instead is now part of your savings.

• Employer contributions.
Employers usually give money depending on the amount that you contribute. However much an employer may give, the point is that it’s still free money!

• Ability to control investment mix. Though a third-party administrator will handle the investment portion, you control whether you want to put your money in bonds, stocks, or money market accounts.

• Emergency fund.
You can take a out loan on your 401(K), or withdraw your funds before they mature (maturity is when you reach 59.5 years of age). This means you know you have something to fall back on in case of emergency. However, remember that for loans you’ll need to pay interest. For withdrawal of the entire fund, you’ll need to pay taxes plus 10% penalty to the IRS.

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