February 14, 2018

What is a 401k Plan and How Does it Work?

You have a few retirement accounts that you pretty much ignore – one with your current workplace and a couple more from your past jobs.

If that sounds familiar, then you’re one of the many Americans who find 401k plans confusing. How do they work? How can you manage them? What should you invest in to maximize your return on investment?

All these are valid questions that a Dallas financial planner can answer.

Let’s begin with the basics: understanding what 401k plans are and how they work.

 

What is a 401k Plan?

A 401k plan is the most common type of defined contribution retirement plan. Technically, it is an arrangement that allows an employee to choose between taking compensation in cash or deferring a certain percentage of it to a 401k account under the plan.

 

How Does it Work?

The procedure is quite simple. All you have to do is decide how much you want to contribute and your employer will put the money into your account through payroll deduction. The employer works with a third party, such as a mutual fund company, a brokerage firm or an insurance company to administer the plan and its investments.

It is important to keep in mind that the 401k plan is a retirement plan, not a savings account. In other words, you won’t have easy access to the money you place in your 401k. However, some plans do allow loans and hardship withdrawals, but the rules are restrictive. So make sure you go through all the possible scenarios with your financial planner.

If you think you can’t afford it and you decide to put off participating in your 401k, remember that the sooner you start contributing, the better. Even though it may seem like an effort right now, it pays off in the long run.

When it comes to making financial decisions, it is always best to work and take advice from professionals. If you are looking for a Dallas financial planner, get in touch with us at Exemplify Financial, where you will find a qualified team that can help you make the best investment decisions.

Sources:

https://www.investopedia.com/articles/retirement/08/401k-info.asp

http://money.cnn.com/retirement/guide/401k_401kplans.moneymag/index.htm

 

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