So, you are excited to start on your first job and here comes the paperwork for a retirement savings plan that you have to fill out. 401K plans may seem overwhelmingly difficult to understand initially, particularly for those who know little about finances. Fortunately for you, 401K plans are, in fact, very easy to set-up and serve as an assurance that you will have money in the future when you retire.
401K Retirement Plans got its name from the Internal Revenue Code particularly after the section where the rules governing its operations are prescribed. Its other name is Cash or Deferred Arrangement plan, CODA. It is a retirement savings plan that companies, non-profit institutions, and other organizations exempted from paying taxes can set up for their staff. State government employees, however, are not covered by the 401k plan. These plans are under the regulation of the Employee Benefits Security Administration of the U.S. Department of Labor.
Source of funding are employees' contributions and employer's counterpart contribution. Contributions are calculated from before tax salaries and the funds remain tax free even as it grows, but only up to the time the money is withdrawn. Some employers deposit a 50% matching contribution for the employee in their 401K plans. Additionally, they can make separate contributions to the employees' account, which could be tied together with the firm's profits for some profit sharing scheme.
Other 401K plans are directed to several investment options such as mutual funds, company stocks or stock market. An employer can allow the employee to delay receipt of a portion of his or her earnings by depositing that portion to his/her account, as prescribed by the plans. And, employees are given control over their investments because they can choose where savings and future contributions are to be directed. If the employee decides to move to another company, he can transfer all his contributions to his new company's plan.
The popularity of 401k plan providers is because of its double benefits - savings for retirements and savings on tax accountability. An employee may not be able to understand everything about these plans at first, but it is no cause for concern. Whatever their issues or questions, these can be mostly addressed by the employer. In fact, some employers are even working with financial advisors who call on the office to talk about investment options for those who may be interested.