Basics of The 401K Plan

The foundation of most 401k plans are the same. Participants contribute money into their retirement plan, while their employer may choose to match these contributions and increase the amount that is saved. The participant’s contributions are made prior to payment of tax. The money that is placed in the 401k plan will be invested. Various different investment options are available.

The participant benefits from reduced taxes because the money that goes into their 401k is taken before tax is deducted from their earnings. In fact, they will not pay tax on this money until they begin to make withdrawals from the 401k. Their employer will also be eligible for tax credits when they set up the 401k retirement plan.

The costs of running a traditional 401k retirement plan can be high. They may also have to cover high costs, including the expensive discrimination testing, which is required for all traditional 401k plans. Discrimination testing compares the amount that is being contributed to the plan by the higher and lower earning participants. If the balance between these two groups is not right, then the business will have to pay a penalty fee.

Small businesses may benefit more from a Simple 401k. This type of plan requires less administration while offering the same benefits as a traditional plan to the participants. There is no discrimination testing, but the employer must match contributions for all eligible employees.

Related posts:

1. Looking for a 401K For Your Small Business?
2. Discrimination Testing for 401k Retirement Plans
3. Options For 401k Providers And Plans
4. The 401k Employee Retirement Plan
5. How You Benefit From a 401k

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