Blog Your Site

One popular way of saving for retirement is by investing into a 401k plan. But what exactly is this? What is a 401k plan? Well simply put it is a savings plan which allows an investor to put a portion of their paycheck into it pretaxed and have that money grow tax deferred for many years.

The biggest benefit of the plan is that it is tax deferred. This means that any money which you invest into a 401k is going to be able to grow without having to be slowed down by the IRS. That is pretty big when you consider how much taxes really take out of your income.

Of course there are a few disadvantages to this plan as well. There is a maximum you can put into a 401k. You can’t simply invest 90% of your income in the stock market live off of your spouce for 20 or 30 years then retire a decamillionaire, there are rules in place.

In addition to that there is also a minimum age that you are able to take money out penalty free. The 401k withdrawal rules say that if you take money out before the age of 59 ½ you must pay a 10% penalty on your money in addition to the taxes. That means that if you take money out early a huge chunk of that would go to paying off these other bills. The plan is for retirement however, so taking money out early should not really be much of an issue.

There is one tricky way to get around this however. You could take out a loan from your 401k and that could allow you to allow you to take money from your plan in a loan form without paying either taxes or the early withdraw penalty.

The 401k loan rules are also a little hard however, you do have to pay it back with interest and depending on your plan you may not be able to deposit any more money until you do pay it back.

All and all a 401k can be a great way to save for retirement; it has helped a lot of people save up money for their retirement and continues to help people today. They key to using it correctly is leaving the money in the plan for the long term and not tapping into it until you need to.