Understanding the Basics

Introduction

One of the best benefits ever developed to help employees fund their retirement is known as a 401(k) plan. These plans make it easy for you to save money for retirement. The benefit of 401(k) plans is that tax on compensation can be deferred many years, from the time the compensation is earned until the time it is received. Different employers call their 401(k) plans by different names. Don't let the terms confuse you. Sometimes 401(k) plans are called 'salary reduction plans,' because you 'reduce' your salary to put money in the plan. 'Cash or deferred arrangements' or 'CODAs' is another name you might hear for a 401(k) plan. Some employers just call the 401(k) the 'savings plan' or 'the thrift plan.' Employers may also have a profit sharing plan that includes a 401(k) plan feature.

For many people, a 401(k) plan is full of both wonderful opportunities and confusing choices. Spend some time with this 401(k) section. It will help you to better understand 401(k) plans, putting you in a better position to evaluate your options and make decisions. After you've done so, you will:

  • understand what a 401(k) plan is;
  • know why you should participate in a 401(k) plan;
  • be able to determine how much you should be saving for retirement;
  • be aware of the different investment options for your 401(k) assets, and understand why you need to monitor your investment choices;
  • understand the different options available to access your 401(k) funds if you need the money;
  • be aware of the tax consequences when you withdraw money from your 401(k) plan; and
  • feel comfortable with the 401(k) plan distribution options you have when you are retiring.
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