The history of the 401k is very interesting. Many people wonder exactly where it got its name from. They also wonder about the origins of this particular type of retirement plan.
In truth, the 401k is relatively new in world history, although it’s been around for about 50 years now. But it has an interesting history that we will tell you about below.
The Revenue Act of 1978
In 1978, Congress passed a law known as the Revenue Act of 1978. This law had a major impact on retirements and investing, especially setting up a nest egg for you and your loved ones when you reach retirement age.
In this act, there was a specific provision added to it that was recognized by a gentleman by the name of Ted Benna. Ted recognized a particular segment known as section 401k. In this section, he discovered that employees were given a way to defer stock option and bonus compensation in a tax-free manner.
As you can imagine, Ted and other wealthy individuals jumped at the opportunity to take advantage of this law that went into effect on January 1, 1980. This law made it possible to take a portion of your salary and invest it into stocks, bonds, mutual funds, and other investment vehicles without having to pay taxes until you retire and begin collecting distributions.
Also Read: How Much Money do I Need to Retire?
Who is Ted Benna?
At the time of the discovery of this provision known as section 401k, Ted Benna was working for Johnson Companies as a benefits consultant. As soon as he spotted this law, Benna recognized that it was a major opportunity for employers and employees all around the world.
The big benefit is the tax advantage savings. Employers have the opportunity to create a tax-advantaged savings account and give access to their employees. This account means that individuals working in regular jobs can set aside a portion of their salary – although that rule didn’t pass until 1981 – and collect this money to save toward their retirement. If an individual can collect money for 30 years, and invest it so that it earns compounding interest, they’ll have a nice chunk of change on their hands by the time they want to stop working for a living.
This massive accumulation of wealth and tax deferred investment growth is fueling today’s retirement options for the wide majority of people. But in the beginning, it didn’t work the way that it does now and we’ll tell you all about it below.
The 1981 IRS Update to 401k Rules
There was a rule change made by the IRS regarding 401k plans in 1981. This rule change was significant because within it, it gave employees the ability to contribute to their 401k through the use of deductions in their salary. This is one of the many 401k advantages.
Sure, at first these employees undoubtedly missed the extra money in their paycheck. But over time, that extra money turned into a large retirement account for them so that they can retire comfortably without having to work. This type of 401k plan rollout happened throughout the early 1980s.
As you can see, the 401k certainly has a very interesting history. Thankfully Ted Benna of Johnson Companies recognized this provision when he did. Otherwise retiring comfortably in the United States would be very different than it is today.