Frequently Asked 401k Questions

Do I need a 401k plan?

Now, more than ever, the need for 401k Retirement Plans for American workers is apparent. Social Security, never meant to deal with the burden that has been placed on it of late was not designed to support a large generation of retirees who lived well past the point at which they stopped working. Personal savings have gone down significantly in the past few decades, from 12% of GDP in 1965 to 5% in 1995. There are traditional pension plans and retirement funds that might offer some relief, but these are not available to all workers, including those without benefits and the self-employed. Finally, while other means of providing for oneself after working exist, none are as versatile and with the same potential for growth as 401k plans.

401k plans are a better choice, mainly for the maximum allowable contribution that IRA's lack. While Individual Retirement Funds might be beneficial for some individuals, 401k's let you contribute much more money per month. You can defer up to $10,500 from your salary before taxes. Between matching gifts and profit sharing features that some companies offer, you can add as much as $25,000 annually. IRA's only allow $2,000.

Matching funds are dollars that are added to your 401k fund from your employer along with your regular contribution. The contribution of your employer is generally a smaller proportion of what you add, around 50%. This is done as an incentive by companies to encourage 401k investment on the part of their employees. For the exact details and level of matching funds added by your workplace, inquire with your 401k plan administrator.

Normally, if you were to invest money in some sort of mutual fond or stock, you would only be able to do so with money that you had earned and already paid income tax on. Tax-deferred refers to the fact that because you are investing money from your paycheck immediately into a 401k fund, you will do so before taxes have been paid on it. You will have to pay taxes on this when you remove the money from your account, be it upon retirement or for an emergency.

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