– What Is a 401(k) Plan? What Is The reason to better use a 401K aka 401(k) Plan?
- A 401K plan is a company sponsored retirement investment account that employees can contribute to every day. Employers may also make contributions to this accounts depending on company policy.
- There are two basic types of 401K’s. One is the traditional plan and the other is the Roth plan. The main difference between them is the taxation configuration.
- Traditional 401K plan normally states that employee contributions reduce their income taxes for the year they are made, but their withdrawal amounts are taxed.
- The Roth plan normally states that employees make contributions with their post tax income but can make some withdrawals tax free or no tax payed. The 401K plan – is an asset account, managed by asset managers like a savings account. An account that in which you put money in for using that cash when its time to retire. The money you put in grows over time and in the end of your work life. you will take that money out and enjoy retirement. It’s that simple. Just be cautious and do your financial research so your 401k gets the best asset managers looking after it.
Why use a 401K plan and not just a cash savings account?
The reason to better use a 401K plan and not just a cash savings account is that 401K accounts offer better benefits regarding your income taxation. 401(K) plan makes paying taxes easy by protecting your income until later. The money you put into your 401(k) is not taxed right away. For example if you contribute 1 year to your 401K plan account you will actually pay less income taxes for this exact year. A 401(K) plan is actually a good investment plan managed by professional asset managers.
You now know why 401k accounts offer better benefits.
Now that you are all informed about the 401K please feel free to browse our other financial investing terms in our glossary of terms.
- If you found this article useful please check our other articles as well starting with the Annuities page.
- Also check out 401(K) Hidden fees article on this link.