Finance Agreements

Understanding what is 401k and what benefits employees can have from this will help them a lot to plan for a comfortable retired life. It is a financial panning option meant for US employees useful for saving money for their retirement. The 401k plan can be taken only through an employer and the money is usually deducted from the salary. How much can be taken out of the paycheck is emploeey’s choice.

The money is generally invested in:
• Money market funds
• Growth funds
• Index based stock funds

The amount that is deducted is pre-tax.The contribution of the employee in general is about $16,000 per year. As 401k plan does not get protection from the ‘Pension Benefit Guarantee Corporation’ and the is an element of risk involved like any other similar investment plan. The money invested may or may not go as expected as it depends on where you intevested. There is always a danger of losing money if invested unwisely.

The biggest benefit of 401k is the employer will match a percentage or all of the employee’s 401k contribution. This is called ‘401k match’. For example, if an employee contributes around 15% of his salary towards the 401k plan, the employer can match this with the 15% or less. It is estimated that at about 80% employers follow the same. This is taken as part of employee benefits and is one of the ways attract and retain good employees. The greatest advantage with 401k plan is that it does not attract any income tax until the funds are withdrawn from the account.

There are many benefits of the 401k plan: It is easy to comprehend and taken part in it; different investment options are offered to the employee, so he can choose to go with less risky investments; 401k plans are flexible in that they allow employees to increase or decrease the percentage of their contribution and also the type of investment they decide to put their money in. Hence, depending on other financial commitments, employees can decide to increase or decrease their contribution.

401k plan also gives employees a provision to borrow money in case of emergency and this will not show up in a credit history. One can use this money for medical emergencies, school fees, home repairs, repay mortgages or any other purpose. But the point is, the loan will attract some charges and during the period of repayment of loan, the employer’s contribution will cease.

The 401k match rules will be decided at the time when an employee is hired. If your company offers a 401k match, be sensible to try and contribution as much as possible from your paycheck as the same amount will be matched by the employer. The more you contribute, the greater will be the amount you receive at the time of your retirement.

The employee has the right to choose their own investment program. So, use this opportunity and get the help of a trusted financial advisor as to the best scheme to invest your hard earned money in. It is better that the financial advisor has no links to your company, so that he will be impartial in his advice. Some companies could have standard places where they will invest, which may not always be to the advantage of the employee. Safe and steady growth of funds is of prime importance. Hence, it is important to invest wisely in programs that will offer steady and not spectacular growth, which could often be a recipe for disaster.

Finally, just like an insurance policy, you must state clearly who the beneficiary of your 401k plan will be in case of your untimely demise while there is still money in the 401k account. The 401k beneficiary is typically nominated at the time the plan is started. Invariable it is the spouse who is the automatic beneficiary. Even if the couple is separated, the spouse is still the beneficiary unless a waiver is signed. Apart from spouse, children, partners or a trust can inherit any money in a 401k savings plan. While the 401k is not a foolproof plan, it does offer safe and steady investment options to salaried people.

Article by David Livingston of EQuote. For more information on life insurance rates and no medical life insurance, visit his site today.

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