How to Choose a 401k Plan
When people reach their later years, they include the 401k plan offered by their employers when they do retirement planning. 401kplan concept is a simple one but the facts different from the basic premise of saving for retirement. In this plan, a portion of your income is set aside and invested in the plan. You will earn money on your retirement from the money invested. It may seem so simple yet you must be aware of the facts relating to this plan so that you can be sure that it is the right choice for you.
Eligibility for the 401k plan includes employment by a company that offers the plan to its workers. Some companies, however, do not offer it which removes your eligibility, or if you don’t like to invest in it then you can opt to open an IRA retirement account instead. If you want to invest in the 401k plan of your company, you must follow three steps. First you need to submit paper work to your employer which you should fill out. The if you company offers an orientation session, you should attend it. Materials will be provided for your reading if the company does not offer an orientation session. These materials will explain the rules of the 401k. Your investment choices will be included here but which will vary depending on the provider. Do not commit to the 401k plan unless you already have a thorough understanding about the plan.
Next is to decide the part of your income that you want to contribute to the plan. Your contributions will be matched by many companies. You should consider that this is a very important factor. If your company offers a 100% match then a 401k plan would be a great choice for you. Choosing your investments to use will be the next step after determining the contribution amount. Stocks, bonds, and mutual funds are the choices give you for many plans. You have to remember that you have the right to stop contributions any time. If you decide to stop contributions, you can simply notify your employer.
You can avail of two types of plans, namely, the traditional 401k plan and the Roth 401k plan. There is a difference in their tax advantage. Two benefits of the traditional plan is the ability to take contributions before taxes, and to later invest the money into a tax deferred account. Money from your paycheck is used in the traditional plan before taxes are taken out. This reduces taxable income.
The opposite is true with the Roth since no contributions are allowed pre tax. Whatever you contribute to Roth 401k you income remains the same. But this is beneficial when you reach the age to withdraw from the plan, and when this happens the money will be available tax-free.