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What Is a 401k Plan and How Does It Work?

A 401k plan provides the opportunity to take money out of your paycheck and invest it into a retirement account provided by your employer. This account is usually run by your employer, it has an administrator, and it takes the money you put in and invests it into stocks and bonds on your behalf.

What Will I Get from My 401k Plan?

Overall, the main reason to invest your hard earned money into this plan is to have money available to you when you finally decide to retire. You work hard and deserve to have a nest egg at the end of your working career. But instead of having to figure out the stock market and other investment vehicles on your own, your job and the administrator of the 401k plan will handle all of the investing for you.

For many people, having a 401k account provides peace of mind as we get older. Funding this account as best you can during your working career means you’ll have access to this money when you reach retirement age and no longer want or need to work.

Most people cannot survive on their monthly Social Security check on once they get older. So a 401k plan provides additional supplemental income once you reach 59 ½ years of age or older, which is when you can get access to your retirement funds.

What about 401k Plans and Paying Taxes?

The best part about this retirement account is it is a deferred plan. This means that everything you put in from your paycheck will not get taxed until you begin withdrawing it in retirement.

As an example, let’s say you have $50 deducted from your paycheck each week to fund your 401k account. This money isn’t money that you receive after taxes are taken out. On the contrary, this is money you’ve earned before taxes were taken out and it is deposited into your 401k plan account.

The benefit of tax-deferred investments is you get the benefit of having pretax dollars grow in your retirement account. This way you’ll be able to put more money in this account and you will not have to pay taxes on it until the money has multiplied and compounded over many years in your growth account.

What Are the Contribution Limits for a 401k Plan?

The contribution limits change regularly as you will definitely learn. But in tax year 2019, if you are below the age of 50 you can put as much as $19,000 into your 401k account.

As you get older, the contribution limits get even better. Anyone 50 years of age and above can contribute up to $25,000 into their 401k retirement account. So if you start late, you can make up for it by putting the maximum into this account at age 50 years or older to make up for lost time.

You also may want to read about how to invest in gold in your 401k.  As discussed frequently on this website, precious metals investing is becoming quite the norm for people looking for a long term hedge against a stock market crash or currency devaluation.

Final Thoughts

As you can see, a 401k account is quite beneficial and very easy to understand. In some cases, your employer will even match your 401k contributions up to a certain amount. Take advantage of this opportunity if it’s offered to you because it’s almost like getting free money.

At the end of the day, it’s definitely wise to save for retirement. So if your employer offers a 401k plan, you should jump at this opportunity sooner rather than later. You do not want to end up with nothing once retirement age rolls around.

Tim Schmidt

A Florida-based Entrepreneur, Author, and Life Hacker, Tim Schmidt decided to take control of his retirement portfolio several years ago by setting up a self-directed IRA. This website shares his thoughts and opinions on retirement, investing, and managing credit. You can follow his career and travels on his Official Website as well as on his Instagram page.