Typically, we don’t have a choice in regards to working or not. Many of us dream of what we could do with our time, if it was all ours. A lot of those daydreams probably have us relaxing on a beach somewhere, sipping a cocktail after a long round of golf and a visit with the grandkids. Will it be like this?
Unfortunately your retirement may not be that comfortable and you may even find the years you can retire rapidly shrinking with the rising cost of living today. This is why making provisions while you are still working is extremely important. One of the many options available to you is a 401k retirement plan that can help provide you an income when you retire.
How it Works
There is a very simple principle to the way a 401k retirement plan works, which makes it a very attractive way to invest for your golden years. You simply deduct a certain amount of money from your salary and your employer also contributes a matching amount. While the money is accumulating you can choose how you would like to have it invested.
There are a few options available in a 401k retirement plan such as mutual funds, which are money market funds, bond funds of varying maturities and various stock funds. Some companies allow employees to invest in company stock as well. Generally stock funds give the best performance to the individual who chooses to invest in this way.
The reason a 401k retirement plan is so attractive is the fact that while the funds are accumulating, the money is non-taxable. That’s right - you do not have to pay tax on these savings. Because you can choose to contribute to your 401k retirement plan on your salary pre-tax, you pay a lower income tax rate. However there are limits as to how much money you can contribute pre-tax to your 401k retirement plan annually.
There are also benefits from contributing money from net pay as money in your 401k retirement plan that is contributed after taxes is not taxable. Contributing in this manner does not help out an employee’s present tax situation, but it does however help in the future. A 401k retirement plan can grow considerably over the average working life of any employee and can provide comfortably well into old age and therefore this is certainly an investment plan worth looking into.