401k plans have become very popular with employers. These plans are being used in place of pension plans to offer a retirement option for employees. Since the plans are handled by third party investment firms, they are safer for employees because the fund doesn’t disappear if the employer goes bankrupt. As long as the employee doesn’t invest his entire 401k fund into company stock, his 401k will continue to grow even if the company goes under. Here are the basics of a 401k account.

401k plans are a tax-deferred retirement savings plan. They are administered by a third party investment company, not directly through your employer. The tax advantages are that you don’t have to pay taxes on the money you put into the account until you take it out. Most people fall into a lower tax bracket once they retire, so this could potentially save you a lot of money in taxes.

If you make less than $110, 000 per year, you can contribute up to $16, 500 per year to your 401k, and the total contribution including your employer match cannot exceed $49, 000. The limits increase to $22, 000 and $54, 500 once you reach the age of fifty. If you make more than $110, 000 per year, your employer may be required to reduce the amount you can contribute so that you are not investing a higher percentage of your income than the average worker at your company.

Employer matching is offered by many companies that have 401k plans for their employees. If your employer offers matching, they will put extra money in your 401k account based on the amount you contribute. They may match contributions 100% up to a certain amount, or they may do partial matching. Some companies require the matched contributions to be put into a fund that only purchases company stock.

The money that is invested in a 401k by your company match may or may not be vested immediately. What that means is that in some plans, you have to wait a certain period of time after the investment is made before the money is fully yours. The investment choices available to you in your 401k plan are chosen by your company. You can decide how to invest your money within those options. Sometimes the options are quite limited.

Depending on your company’s policies regarding their 401k plan, it may be able to take out a loan against the vested balance in your 401k. In most cases, the interest rate is very low compared to a traditional bank loan. If you do take out a loan against your 401k, you will be paying yourself back with interest. The downside is that if you lose your job before paying back the full amount, the balance will become due immediately and you will be hit with a tax penalty if you can’t pay it back at that time.

Since many companies now opt for 401k plans instead of traditional pensions, it’s a good idea to get an idea of how they work. That way you can make an informed decision about whether to invest in your company’s plan.

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