How Does A 401K WorkHow does a 401k work? A 401k is a tax deferred retirement plan offered by you employer. Only an employer can sponsor a 401k for their employees. You decide how much of your pay check you wish to deposit into this plan based on what you can afford and IRS regulations that limit your amount of contribution. This amount is then deducted from your pay check (pre-tax) and deposited into the plan. Quite often the employer will match your contribution up to a certain percentage, although they are not required to do so. Seeing as the contribution is deducted from your pre-tax pay and the tax on the contribution is deferred, meaning tax is payed at the time of withdrawal, it also lowers your present tax liability, another benefit. It is your employers responsibility to administer the plan in accordance with laws and regulations, they will also determine who is eligible for the plan, how much they can contribute, whether those contributions will be matched an so on. Because of this the 401k is a very easy way to begin preparing for retirement, it really requires very little effort on your behalf. If you currently have no planned retirement and your company offers a 401k it is a good idea to seriously consider it. The sooner you start preparing for retirement the more comfortable you will be. Keep in mind you may have 30 or more years where you need to provide for yourself, the sooner you start planning for this the better. An early start is one of the keys to success. The 401k does have some drawbacks, it is not a savings account and accessing your money in a hurry could be difficult or expensive. Some plans do allow you to access your funds in the event of hardship or borrow money against it, but check the details of your individual plan for the rules on this.
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