401K Plans – Investment Options For The Employees

2007-03-08 10:33:40

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401K plans, named after the applicable section of the tax code, are employer-sponsored retirement plans, where you deposit money directly from your paycheck and into specified investments intended for your retirement.

Unlike ATT wireless plans and Nextel plans, 401K plans are investment vehicles for employees. In 401K plans, you agree to have a certain portion of your salary automatically deducted on a regular basis. Your pre-tax contributions are limited to at most one fifth of your annual pay.

The 401K funds are held in trust for you but you have the choice on how your money should be invested. Depending on what type of 401K plans your company offers, that investment channel can be mutual funds, company stock, bonds or money market funds.

You'll find 401K plans attractive because they offer a mix of individual choice and flexibility, combined with shared security. Your contributions on 401K plans are deducted before income tax. And the funds accumulated on 401K plans grow tax-deferred and are only taxed when you withdraw them.

Depending on your company’s policy, your employer might establish shared plans and match your contributions to a predetermined percentage and dollar amount limit. If you have a generous employer, some 401K plans offer a dollar for dollar match contributions.

You must read your company’s rules and regulations on 401K plans carefully. Check if there’s vesting (time allowed before company matches actually become the employee’s assets). This may take several years or, may happen in increments. You may need to stay in the company for quite some time.

If you are a newly-hired employee, 401K plans may not be available to you upon hiring. You will have to wait a few months before you can join. Should you withdraw the funds on 401K plans before turning 59 ½ years old, you'll be charged with taxes plus ten percent fee.


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