Introduction

There are several types of retirement plans available to employees, but the most common one is a 401(k) plan. These plans allow you to make pre-tax contributions from your paycheck and enjoy tax savings over time. In addition, employers often match some portion of their employees’ 401(k) contributions. These matching contributions are free money that you should always take advantage of because it can be an extra boost for your future retirement savings.

But what exactly is a 401(k)? How do they work? What happens if I leave my job before retirement? To answer these questions and others about 401(k) plans and how they fit into your overall financial strategy as well as other savings options available today (and tomorrow), let me introduce myself: My name is Mark Coombs III, president & CEO of Financial Fiduciaries Incorporated—a professional money management firm based in the South Florida area specializing in helping people create financial strategies for today’s uncertain economic climate.”

401(k) plans

A 401(k) plan is a type of retirement plan sponsored by employers. It allows employees to contribute money before taxes, and the contributions may be matched by the employer.

The name “401(k)” comes from its place in the Internal Revenue Code (IRC). Section 401(k) spells out rules for qualified pension plans and other tax-deferred arrangements. The key word here is “qualified”: If your company doesn’t offer a qualified plan, then what you’re dealing with isn’t technically a 401(k).

It’s also important to note that while some companies call their non-qualified plans “retirement savings accounts” or RSAs, these aren’t true IRAs–they don’t offer the same tax benefits as IRAs do (more on those later).

What is a 401(k) plan?

A 401(k) plan is a type of defined contribution plan that allows employees to contribute a portion of their salary to an account. It’s named after section 401(k) of the Internal Revenue Code, which was created in 1978.

A 401(k) plan is similar to other types of retirement savings plans, such as IRAs or Roth IRAs, because it allows you to defer taxes on your income until you withdraw funds from your account (usually after age 65). In addition, many employers match employee contributions up to certain limits; this means they’ll put money into your account too!

Who can open a 401(k) plan?

401(k) plans are only available to employees of a company that offers them. If you’re not an employee, then you can’t open one. But even if your spouse is the primary wage earner in your household, he or she may still be eligible for a 401(k) if he/she meets certain requirements.

For example The IRS allows workers under age 50 who make less than $18,500 per year (in 2019) to contribute up to $6,000 each year into their account with “catch up” contributions allowed after turning 50 until reaching age 59 1/2. They also allow anyone over 59 years old at any point during the year who earns less than $19,000 annually (including catch-up amounts) to contribute up to $7,000 annually into their accounts without being penalized for exceeding contribution limits set forth by both federal and state law; however, these limits do not apply when figuring out whether someone qualifies for Social Security benefits based on what they’ve saved up through employer-sponsored retirement accounts such as 401Ks – so don’t worry about losing money because you’ve contributed too much!

How do you sign up for a 401(k) plan?

The first step to joining a 401(k) plan is to contact your employer and find out what kind of retirement savings options they offer. If your company does not have a 401(k) program, consider contacting an outside financial advisor or institution for help with setting up an appropriate investment portfolio.

If your employer does offer a 401(k) program, you can start by filling out an application form and providing your personal information. This will allow the company to begin setting up your account with them.

Once you are enrolled in the 401(k) plan, you will be given a list of investment options to choose from. In most cases, this is done by selecting mutual funds or stocks that you feel comfortable with. If you do not know much about investing, consider asking an advisor for help with this process.

Can you contribute to your employer’s plan?

You can contribute to your employer’s plan. If your company offers a 401(k) or SIMPLE IRA, then you can contribute to one of those accounts. The maximum contribution limit for 2019 is $18,500 per year (or $25,500 if you’re age 50 or older).

The amount you contribute depends on how much money is in your account and how much income tax you pay on that income–if any. For example, say that in 2020:

• You earn $100 in interest from the bank on your savings account;
• Your employer contributes $1,000 toward your retirement savings, and * You don’t owe any taxes on either amount because they fall within the “no tax” range of $19-20K (for single filers). In this case, there is no reason not to max out both parts of our example equation: You’ve got plenty left over after paying off essentials like rent/mortgage payments so why not put it toward growing something useful like savings?

What are the advantages of contributing to an employer’s plan?

The most obvious advantage of contributing to an employer’s plan is that it allows you to save on taxes. For example, if your contribution was made before tax and then invested in a mutual fund that returned 10 percent per year, the growth would be taxable when withdrawn. But if you had contributed after-tax and invested the same amount in that same mutual fund, the growth would not be taxed upon withdrawal.

Another advantage is that your money can grow faster because you’re investing it sooner rather than later–and this applies especially if you’re saving for retirement or other long-term goals such as paying off debt or buying a home down payment (or both).

What are the disadvantages of contributing to an employer’s plan?

The disadvantages of contributing to an employer’s plan include:

• You can’t take the money out until you are 59 1/2 years old. If you withdraw funds from your account before this time, there is a 10% penalty on top of any taxes that may need to be paid( The rate of growth would vary depending on how long the money was invested.)
• The money must be used for retirement purposes only and cannot be used for other things like buying a car or paying off credit card debt.

What happens if you leave your job or retire and still have money in a retirement account?

If you leave your job or retire and still have money in a retirement account, there are four options:

• Leave it in the plan. You can keep your money where it is and continue to contribute to the plan if you choose to do so.
• Roll over into an IRA (individual retirement account). This allows you to take control of your investments and manage them yourself, but keep in mind that there are fees associated with opening and maintaining an IRA account–and they’re not always easy on small balances like those found in 401(k)s.
• Roll over into a new employer’s plan if one exists at another company where you find employment after leaving yours; otherwise, see option 3 below for other ways of handling this situation without paying fees or taxes on distributions from old 401(k) accounts before age 59 1/2

How do dollars accumulate in a traditional 401(k)?

Let’s say you contribute $1,000 to your 401(k). The money is invested in the plan’s investments and grows tax-deferred. When you withdraw money from your account, whether it be at retirement or an earlier age, you pay ordinary income tax on the earnings. In addition to this ordinary income tax, most people also have to pay a 10% penalty if they’re under 59 1/2 years old (there are exceptions for certain circumstances).

The contributions themselves are never taxed until they are withdrawn from the account–or even if they stay invested!

What happens with the money that is not withdrawn from a traditional 401(k) when you turn 59 1/2 years old and still working?

Once you reach 59 1/2 years old, you can withdraw money from your traditional 401(k) for any reason. You may also have the option to take an early-withdrawal lump sum or make periodic withdrawals based on a fixed schedule. If you choose this route, interest will be charged on the amount withdrawn until it’s paid back into your account.

If you need access to funds and don’t qualify for hardship withdrawals (see below), then borrowing from your plan may be an option. In general, borrowing should only be considered when there is no other way around it; interest rates are high, and the IRS considers such loans taxable income! Some plans do not allow loans at all while others limit them significantly by offering only short-term terms or smaller amounts available per year/pay period as low as $50-$100 at most–so make sure yours does before applying!

Conclusion

We hope you’ve enjoyed this brief look at the world of 401(k) plans and that you now have a better understanding of how they work. If you’re looking for more information on your options when it comes to retirement planning, check out our other articles here at Investopedia.