How 401 K Works and Its Major Benefits

How 401 K Works

How 401 K Works

There are so many ways to save up for the future and invest your retirement funds in order to ensure that you and your family will live more financially secure and stable lives. And you really do not have to wait until you have decided to really retire from your job to be able to do so. Now, with more and more employers and companies offering the 401k plan to their employees, you are now able to take advantage of the opportunity to save up and allot funds to pave the way for your comfortable retirement. When it comes to having the knowledge on how 401 k works and the different ways this plan can be beneficial, you have to first understand what it is.

What is a 401K?

A regular 401 k retirement plan is usually offered by employers (from both public and private companies) to help their employees save money towards their retirement. Business owners without employees can also set up a Solo 401k plan for themselves and their spouses. There would be a defined contribution requirement, limits are to be met and of course deadlines should be observed. This year, the deadline for elective salary deferral contribution is the 31st of December; while employers have until the 16th of April, 2016 to complete their share on contributions. To be able to understand how 401  k works, here are some details that you need to know:

  • Employee contributions are satisfied through deductions from monthly paychecks, just before they are taxed. This will help employees lower their taxable income as well.
  • All public and private owned company employees are offered the chance to apply for a 401k. While there are companies who immediately make their employees eligible to make contributions, there are instances wherein one needs to apply and wait for 6 months to a year to be able to make contributions.
  • The maximum 401k contribution is currently at $18,000 for employees below the age of 50 and $24,000 for those who belong to the 50 years old and above age bracket. Employees are 100% entrusted to make their contributions without fail. This means that you are responsible for making your contributions by setting up a portion of your monthly paycheck as your 401k contribution.
  • Employers are, although not mandated by law, welcome to match the amount of contribution paid by their employees. The percentage of contributions differs from one employer to another and it usually ranges from 25% to 100%.

How 401 K Works: How is This Beneficial for You?

If there is one thing that you should know about how 401 k works, it would definitely be its ability to help you save up for the future without worries and stress. Since your contributions will be deducted from the salary that you get every month, you do not have to think about budgeting or looking for additional financial resources.

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