As follow up to our recent question about a pension, I wanted to share information about the 401K retirement savings account. Many employers still offer this retirement benefit and employer matches are rebounding along with the economy. So what is a 401K plan?
A basic 401K plan allows employees to contribute money pre-tax to a retirement savings account. If an employee contributes to the account pre-tax, the money comes out of their paycheck before taxes are taken out, thus lowering their taxable income for the year. Upon retirement (in most cases), when funds are withdrawn, the employee will pay taxes on their contributions and subsequent earnings.
For 2012, employees can contribute up to $17,000 or for those employees over 50, they can contribute an extra $5,500 to “catch up.” If you receive a company match of your contributions, it may be contributed above the $17,000 annual limit.
Finally, in most cases, a 401K plan is offered through an employer. The employee then will enroll in the employer’s selected 401K plan offering but can select how they choose to invest their money.