A 401k is one of the most popular retirement savings plans available to American workers – and for good reason.
Sponsored by employers, 401k plans offer individuals a structured and tax-advantaged way to prepare for life after work. No matter where you are on your journey to retirement, understanding your options and benefits is essential to building a secure financial future.
What is a 401k?
A 401k is a retirement savings plan that allows employees to set aside a portion of their income before taxes are taken out. This pre-tax advantage means that your contributions reduce your taxable income for the year, which can lead to immediate tax savings.
Once in your 401k account, these funds can be invested in a variety of options, including stocks, bonds, mutual funds, and target-date retirement funds. Over time, the compounding growth on these investments can lead to significant savings, especially when started early.
How Does a 401k Work?
- Enrollment: Employees can enroll in their employer’s plan and decide how much of their paycheck they want to contribute.
- Contributions: Contributions are automatically deducted from each paycheck and deposited into the 401k account, often before taxes are withheld.
- Employer Matching: Many employers offer to match a portion of employee contributions, which can help employees grow their retirement savings more quickly
- Investments: Employees choose how their funds are allocated across available investment options.
- Growth: Investments grow tax-deferred until retirement, when withdrawals are taxed as ordinary income.
- Withdrawals: Typically, you can begin withdrawing funds penalty-free at age 59½. Early withdrawals may incur penalties and taxes.
Types of 401k Plans
It’s important for individuals to understand the specific details and rules of their employer’s 401k plan, including contribution limits, vesting schedules, and investment options.
We can recommend 401k plans that are best suited to your goals and benefit your employees. Some popular options include:
- Traditional 401k: Contributions are made with pre-tax dollars. Taxes are paid upon withdrawal.
- Roth 401k: Contributions are made with after-tax dollars, but withdrawals (including earnings) are tax-free in retirement.
- Solo 401k: Designed for self-employed individuals or business owners with no employees.
- SIMPLE 401k: For small businesses with 100 or fewer employees. Offers a simpler, less expensive alternative.
Why Your Business Should Offer a 401k
Offering a 401k is standard for most businesses. However, it’s more than just a simple perk. The right retirement plan can help your business attract and retain top talent in a competitive market. Matching contributions can further improve employee morale and encourage retention.
If you’re an employer looking to offer a retirement plan, we can help.
Get started with your personalized financial plan today.
FAQS
Looking for more information on 401k plans? Find your answers here.
What is a 401k?
A retirement savings plan offered by employers that lets employees contribute a portion of their wages to individual accounts.
What is the average 401k balance for retirees?
The average 401k balance for retirees is between $150,000 and $250,000, though actual needs may vary based on lifestyle and retirement goals.
When can I withdraw from my 401k?
You can begin penalty-free withdrawals at age 59½. Early withdrawals may incur a 10% penalty in addition to regular income tax.
