Welcome to professorsavings.com, we teach finance basics. Today we will teach you about an introduction to 401(K).
Hi I’m Rayfil Wong. We hope these investment concepts will help you be a better investor.
The 401(K) Plan is one of the most widely used retirement vehicles. 401(K)s are established by employers to help employees realize their retirement goals.
It is considered a qualified plan, which means it is eligible for tax benefits.
In a 401(K) Plan, you could make contributions from a portion of your employment earnings. These contributions can be made before or after payroll taxes.
Once the contributions are in the account, the profits made from investing these funds grow on a tax deferred basis.
This means that if you make pre-tax contributions from your pay, you won’t pay taxes on your gains until you withdraw them in retirement.
This allows you to reduce your current taxable income and put off those taxes until retirement when you’ll likely be in a lower tax bracket.
Some 401(K) plans known as Roth 401(K)s allow you to make after tax contributions so you won’t pay tax when you pull the money out after you retire, but you need to hold the money in the plan for a minimum number of years before withdrawing it after retirement.
Some employers also match the amount an employee puts into the account or offer other incentives like profit sharing.
This is a great way to boost your savings but the IRS does set limits on how much you can contribute to these plans and also sets restrictions on how and when you can withdraw the funds.
Because of their tax advantages, 401(K) plans can help your retirement savings grow much faster than saving and investing without them.
If you start contributing early and invest wisely, the 401(K) will help you leverage time and reduce taxes while achieving your retirement goals.