28 Mar

What is a 401(k) and what are the Benefits?

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If you’re an employee in modern day America, chances are you have probably heard of a 401(k), but you may not know exactly what it is, but you are not alone. The 401(k) was adopted in the late 70’s and is now the most widespread type of employer-sponsored retirement plans. There are many different types and variations of 401(k)’s but the idea and purpose of them remain the same.

What is a 401k?

Essentially, as stated before, a 401(k) is a retirement savings plan that is offered to employees. The plan provides tax breaks on money that employees set aside for their retirement. Different amounts of money can be automatically taken out of an employee’s paycheck and set aside for a personal account and tax deductions can be implemented on either the deposit or withdrawal of money from the account.

Benefits of a 401(k)

There are many benefits of having a 401(k), which is why it is the most popular form of retirement plan. One of the main perks of a 401(k), is that many employers will match a certain percentage of your total contribution dollar-for-dollar. You can essentially be getting free money up to a certain amount when you have a 401(k), and who doesn’t like free money!

Tax Breaks

Tax benefits are another huge perk of opening a 401(k). Contributions to your personal 401(k) account are deducted before taxes are taken out of your overall paycheck. Building on top of that, because of the money that has been added to your 401k, there is less total taxable income for the year. For example, if you make $68,000 and contribute $18,000 into your 401(k), then your total taxable income for the year will only be $50,000 as opposed to $68,000 because the $18,000 contribution is protected! Not only that, but the money that is in the personal 401(k) account is sheltered from taxes as well!

You can obviously see why 401(k)’s are such a popular retirement plan; if you need assistance deciphering your 401(k) plan, or have general retirement planning questions, contact Andrew Kyriacou today!

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