The Variety Of 401K Plans

Established by the US Government, 401K plans are one of the best ways for an employed person to build up a substantial amount of money for their retirement. If you are lucky enough to also have an employee pension plan, then combining that with Social Security and a 401K plan can lead to a some very pleasant retirement years. Starting your financial planning for retirement as soon as you begin working is the smart way to build for your future. Regrettably not too many young people really do this and many end up trying to catch up later. If your employer offers a 401K, go for it now if you haven't started yet. Don't put it off any longer.

Though there are a variety of 401K plans, some of which are applicable only in specific situations, all except the 401K Roth share one common feature. The amounts deposited into the plan are pre-tax dollars. What this means is that you will reduce your monthly taxable income since you will not be taxed on these funds. Essentially the deposits become a tax break for you. Once deposited, those funds remain non-taxable as will any monies earned through the particular 401K plan you are using. When you eventually withdraw money upon retirement, the funds will be treated as taxable income. In most cases your tax bracket on retirement will be lower than during your working years so as well as having the tax break and tax free accumulation over the active years of your plan, you will also be paying a reduced tax bite on withdrawal.

The 401K Roth is basically an individual savings plan but funded with after-tax dollars. The advantage here is that accumulation is tax-free and so are withdrawals. Other types of 401K plans include the Individual 401K which is designed for the self-employed person and the Employee 401K. You may hear of Mortgage and Real Estate 401Ks, but these are not specific plans, rather uses which can be made of funds in a 401K depending on the rules of the financial institution handling your 401K.

401Ks allow you to make a variety of investments - you are not limited to an interest bearing account. Each investment type however needs to be considered carefully because some, particularly using a 401K for a mortgage or to purchase real estate may have annoying and complicated financial and tax consequences. You need to be sure you really understand the rules and requirements related to any investment or use you make of your 401K plan before you take the plunge.
Fri, Nov 21, 2008 05:17


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