A 401K retirement plan is an employer sponsored retirement savings plan in which the employee may contribute during their employment to be subsidized by the employer. How the employer may choose to subsidize their employees varies by employer, some choose to match certain percentages of cash investments, others will choose to pay in company stocks, still others will give a standard percentage of the employees earnings to the fund. A 401K retirement plan is a wise investment for employees and employers; as it is a mutual investment in that employee's future, and can be a motivator for an employee to remain with a company. Employees are able to invest any amount they choose into the account and are able to be compensated by their employer for their investment; additionally the money is often taken before taxes, so reduces the employee's taxable income.
Why Invest in a 401K Retirement Fund?
Employers may find invest in their employees through a 401K retirement plan, as such it can make the employees feel more connected with their company, and therefore feel like the investments being made are mutual. Additionally an employer may choose to invest in the 401K plan through stocks and profit sharing instead of cash matching, or a percentage of the employee's contributions to increase as the employee's time with the company increases.
Also a 401K retirement plan gives the employee financial security despite what might happen within the company; the funds in a 401K retirement account are protected even if the company goes bankrupt, pensions are not subject to the same protection. 401K retirement plans are also flexible enough to travel with an employee to other companies, by the invested monies being rolled into the new account.
Tax sheltered retirement funds are a wise investment strategy; they allow the person saving to contribute at personalized increments without the worry of being taxed for every contribution. Once the money is to be drawn out of the account the tax rate is that of new income, and is often not subjected to inflated tax rates compared with the current tax rate. 401K retirement plans and IRAs are examples of a sheltered or untaxed retirement plan.
There are many terrific reasons to contribute to a 401K retirement account, and not a single good reason not to if one if offered by their company. Investing small amounts are better than none, and most people should start implementing their retirement plan by no older than age 30. 401K retirement plans are important especially for people born after 1970 as they will not be able to draw from their social security until at least age 75, and as such is not a reliable source of retirement income; the best choice for people it to invest in their own future.
