Planning to Quit the 9-5 Routine Soon? Don’t Forget to Take a Look at 401(k) Retirement Plans

Advisor July 10, 2020

Are you tired of the regular Monday to Friday work life? Do you want to quit? Before you do, you might want to consider taking a look at retirement options, even if you’re not at that age.

Talking about retirement, have you ever wondered what a 401(k) retirement plan is? What are the different aspects associated with it, and what are its benefits? If not, this guide is your savior. Here we’re discussing everything you need to know about the 401(k) retirement plan.

Unsplash | If you’re thinking of retiring, opting for a 401(k) retirement plan may be a good idea

What is a 401(k) retirement plan?

The 401(k) retirement plan is a retirement savings account offered by companies to their employees in which they can contribute a portion of their salary for the long-term. Technically, this plan has particular tax guidelines under the IRS. Such an account is different from the typical traditional pension plans. One of the primary benefits that come with it is that some companies match contributions up to a certain percentage of your salary.

Two different plans come under this type of account: the traditional 401(k) and the Roth 401(k).

Traditional 401(k) involves contributions made from pre-tax dollars, thereby lowering your taxable income. If you make any withdrawal before the age of 59, it will warrant an additional tax and a 10% fee.
Roth 401(k) involves contributions made from after-tax dollars. This plan doesn’t include a tax benefit. Here, your contributions are tax-free. You can withdraw at retirement or the age of 59 or above. All employers do not offer this plan.

Unsplash | Select the appropriate kind of 401(k) retirement plan

Basic things you should know about the 401(k) Retirement Plan

Maximum contribution amount

The maximum amount you can contribute to such an account as of 2020 is $19,500. People 50 years and above can make additional contributions of $6,500 (maximum). For a joint contribution, the maximum amount that can be contributed is $57,000. For people that are of 50 years and above, their maximum joint contribution amount is $63,500. There are bonus plans for employees who subscribe to this plan.

Read – Learn about the benefits of 401(k)

401(k) investment plans

Companies that offer 401(k) retirement plans will give their employees a choice among different investment plans. These investment plans are usually safeguarded by a financial services advisory group such as Fidelity Investments. The investment plans include bond funds, small-cap and large-cap funds, real estate funds, and index funds. The employee can choose more than one method to invest in.

Unsplash | Understanding things like contribution amount, investments, and withdrawal amounts may also help

Read – Reasons why you should start a 401(k) plan

Withdrawal plans

As investing money is essential, withdrawing from these plans is also paramount. Note that the distribution guidelines of 401(k) plans are different from IRA guidelines. If you want to withdraw from your account before the already agreed time, you will incur a 10% tax penalty. The following criteria must be met before you can withdraw from a 401(k) plan: