A 401(k) retirement plan is a type of employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary on a pre-tax basis. The contributions are invested in a variety of investment options, such as stocks, bonds, and mutual funds, with the goal of growing the savings over time. Here are some key points to understand about 401(k) retirement plans:
1. Employer-sponsored: 401(k) plans are typically offered by employers as part of their employee benefits package. The employer may also provide matching contributions up to a certain percentage of the employee's salary.
2. Pre-tax contributions: One of the main advantages of a 401(k) plan is that contributions are made on a pre-tax basis. This means that the amount contributed is deducted from the employee's taxable income, reducing their current tax liability.
3. Tax-deferred growth: The contributions and any investment earnings in a 401(k) plan grow on a tax-deferred basis. This means that the employee does not pay taxes on the contributions or earnings until they withdraw the money from the plan, typically during retirement.
4. Contribution limits: There are annual limits on the amount an employee can contribute to a 401(k) plan. As of 2024, the maximum contribution limit is $20,500 for individuals under the age of 50, and $27,000 for individuals aged 50 and older.
5. Vesting: Some employers may have a vesting schedule for employer matching contributions. This means that employees may need to work for a certain number of years before they are fully entitled to the employer's contributions.
6. Withdrawal restrictions: Withdrawals from a 401(k) plan are generally not allowed before the age of 59 1/2, unless the employee meets certain qualifying events such as disability or financial hardship. Early withdrawals may be subject to income taxes and a 10% penalty.
7. Portability: If an employee changes jobs, they can typically roll over their 401(k) plan into a new employer's plan or an individual retirement account (IRA) without incurring taxes or penalties.
8. Retirement income: During retirement, the employee can choose to receive the funds from their 401(k) plan as a lump sum, periodic payments, or an annuity. The withdrawals are subject to income taxes at that time.
It's important to note that the specific details and features of 401(k) plans can vary depending on the employer and the plan provider. It's recommended to consult with a financial advisor or the plan administrator for more information about a specific 401(k) plan.