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A 401(k) is a type of retirement savings plan offered by Employers to their Employees. It allows employees to contribute a portion of their salary into an investment account, which is then used to save for retirement.
Employee Contributions: As an employee, you have the option to contribute a portion of your pre-tax salary to your 401(k) account. This means that the money you contribute is deducted from your paycheck before taxes are applied, which can provide a tax advantage by reducing your taxable income.
Employer Contributions: Many employers also offer a matching contribution, where they contribute a certain percentage of your salary to your 401(k) account. This is essentially free money provided by your employer to help boost your retirement savings. The specific matching formula and limits vary from company to company. Within your 401(k) account, you typically have a range of investment options to choose from. These options may include stocks, bonds, mutual funds, or target-date funds. The money in your account is invested in these options with the goal of growing your savings over time.
Investment Options: Within your 401(k) account, you typically have a range of investment options to choose from. These options may include stocks, bonds, mutual funds, or target-date funds. The money in your account is invested in these options with the goal of growing your savings over time.
Tax Benefits: The money you contribute to your 401(k) grows tax-deferred, which means you don't pay taxes on the investment gains or income generated by your contributions until you withdraw the funds in retirement. This can provide potential tax savings and allow your savings to compound over time.
Withdrawals and Penalties: Generally, you cannot withdraw money from your 401(k) account before the age of 59 ½ without incurring penalties and taxes. However, there are some exceptions such as financial hardship or specific qualifying events. Once you reach the eligible age for retirement, you can start withdrawing from your 401(k) account, and the withdrawals are taxed as ordinary income.
Mandatory withdrawal: Also known as RMD – (Required Minimum Distributions) which requires a minimum withdrawal out the account at a specific age. Currently age 73 - there is a formula for the minimum to be withdrawn each year thereafter.
Remember, this is just a simplified overview of a 401(k) plan. The actual rules, regulations, and details can vary, so it's always a good idea to consult with a financial advisor or your employer's HR department for specific information regarding your 401(k) plan.