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The 401k is a scheme which enables employees to have the choice of setting aside a certain amount of money as retirement savings which is deducted by the employer at source. This amount is not taxable at that time. This amount is usually invested in mutual bonds, shares, funds which the company itself favors. Technically the money can be accessed only after the employee turns 60. It is at this time of withdrawal, that the money gets taxed. Premature withdrawal can result in taxation and penalties. These investments are sometimes matched by the employers which benefit both parties in the long run.
Regular investment ensures that the end result waiting for one at the time of employment is high. It is advisable to invest in stocks now as the prices are relatively low because of the recent recession. In the long run the economy is sure to boom again, resulting in high returns when the time for retirement draws nearer. The investment choices are many. Stocks, bonds, money market funds and value accounts are just a few options to choose from. Of these the latter two are the safest bets but have considerably low returns. The other two have more risk involved but yield higher benefits. The trick is to keep contributing and investing in more than a couple of options. That way one’s assets are divided and chances of a loss are much slimmer. One should also keep one’s self well acquainted with the norms of their company policies. Some companies match the employee’s contribution and thus act as a bonus on the retirement plan. One shouldn’t withdraw money before retirement as a hefty penalty is levied on the withdrawn amount.
Above all one should have some knowledge of how the plan works, to ensure that one does not get cheated, especially if the account is being set up by the company itself. Changing jobs doesn’t have an adverse effect on one’s savings. The account can get transferred. The plan can remain the same if one’s choose so. The other option is to move it to another similar retirement account, like the Roth IRA. This scheme is structurally different from the traditional IRA. The determining factors are many including age, income and filing status. One should start planning for the future early on in their lives so that a healthy and comfortable retirement is not a distant dream.
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