This is very common that when someone earns, he has to pay taxes to the government regardless of his age and employment. On the other hand, you know that no matter how much you love to work, you can’t be employed forever and after you cross 50 or 60 years of life, you have to take a long break from working and we also call it retirement. When someone retires, he has no options for earning as he won’t work anymore but still, he is living and has a family so he will need money to provide for them. To manage that situation, employers offer retirement plans for employees.
This way when an employee retires, he gets a huge amount of money which he can invest or spend as he wants. On the other hand, employees have the option to save a small portion of their earnings in the savings account and the best news is that they don’t need to pay any tax on the savings until they withdraw the savings from the account and use it in investment. The 401K plan is actually the same plan that we have discussed here. We have mentioned above that this plan is actually a part of the tax reform act and as it’s section 401 and paragraph K, it is usually referred to as a 401K plan.
Benefits and Advantages of Using 401K Plan:
There is a number of benefits and advantages of a 401K plan but the most important benefit is that when you get your salary check, the savings amount is already been withdrawn from your earnings before tax deductions. This way, you save a small portion of your income in the savings account and you get tax deductions on your salary too. Usually, people work only with regular 401K plans but there is another plan introduced called the Roth 401K plan which is a combination of 401K plan and IRA and it helps the employees to save and invest the money at the same time without any tax payments until the money is withdrawn from the savings account.
Benefits of a 401K plan include:
- Any type of business and organization can set up a 401K plan for its employees whether it’s a sole proprietorship, partnership, a public limited company, or a private business.
- The guidelines and eligibility criteria are set by each individual company for its employees.
- It is up to the employer of a company to declare if a particular employee is eligible for the plan or not.
- The money in the savings account can come from the salary of the employee, the return on his investment, or from the employer too.
- Employees get to save their money in the savings account but they don’t need to pay any taxes on this savings.
- If they want, they can invest the money in any business or idea and the return on the investment is also tax-free.
- The employer is not obligated to make any contributions to the 401K plan of a particular employee but he can do that if he wants.
Free 401K Plan Template:
Here’s the preview of a Free 401K Plan Template created using MS Word.
The download button for our 401K Plan Template is here.