What is a 401(k) Plan?
A 401(k) is an employer-sponsored retirement savings account. You contribute a portion of your salary before taxes, which grows tax-deferred until withdrawal. Some plans also offer Roth 401(k) options, which allow after-tax contributions and tax-free withdrawals.Key Features
- Contribution Limits: For 2024, you can contribute up to $23,000 annually or $30,500 if you’re 50 or older. Employer contributions can boost this total to $66,000 (or $73,500 with catch-up contributions).
- Pre-Tax vs. Roth: Traditional 401(k) contributions reduce your taxable income now, while Roth contributions are made with after-tax dollars and offer tax-free withdrawals later.
- Employer Matching: Many employers match a portion of your contributions, enhancing your savings.
- Investment Choices: You can choose from options like mutual funds, stocks, and bonds within your plan.
Benefits
- Tax Advantages: Reduce your taxable income now with traditional contributions or enjoy tax-free withdrawals with Roth 401(k).
- Automatic Savings: Contributions are deducted directly from your paycheck.
- Compound Growth: Your investments grow tax-deferred, maximizing long-term growth.
- Employer Contributions: Matching funds boost your retirement savings.
Key Considerations
- Early Withdrawals: Withdrawals before age 59½ may incur a 10% penalty plus taxes unless an exception applies.
- Required Minimum Distributions (RMDs): Start at age 73.
- Loans and Rollovers: Some plans allow loans; you can roll over funds if changing jobs.
- Fees: Be aware of administrative and fund management fees affecting returns.
