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What is a 401(k) plan?
A 401(k) plan is a retirement plan set up by your employer to which you can contribute pre-tax income. It’s typically set up with an investment company, an insurance company, or a bank trust department. Most 401(k) plans let you choose from a variety of investment vehicles, from individual stocks or mutual funds to money market accounts. 401(k) plans offer several advantages. First, your taxable income is reduced by the amount you contribute. Second, you don’t pay income tax on the earnings in the account, such as interest and dividends, until you start making withdrawals - presumably at retirement. Plus, many companies match some or all of your contributions. Not participating in a 401(k) plan in that case is like saying "no, thanks" to money from your employer.
Possibly the best feature of a 401(k) plan is that once it’s set up, it’s automatic. The contributions are taken from your paycheck come rain or shine, without you even thinking about it. Over many years, you may acquire a bigger nest egg than you dreamed possible.There are a number of downsides to a 401(k) plan. The most important may be this: Your employer may rely too heavily on a consultant to organize the plan. That may result in investment choices that aren’t very good or are just plain too expensive.Return to Questions
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