Many employers offer 401(k) plans to help their employees save for retirement. However, there is much to learn about the 401(k) – details and explanations that will help someone decide whether a 401(k) is right for them.

Most employers provide tax-deferred investing to their employees in the form of 401(k), which also helps to lower your taxable income because of the pre-tax deduction to fund the 401(k). However, you’ll want to leave money in the 401(k) rather than withdraw since the withdrawals will be taxable based on your tax bracket, along with paying penalties for early withdrawal.

There are restrictions to the 401(k) plan based on what the employer chooses as investment opportunities. They are also limited by the 401(k) fund manager. Despite the restrictions, the 401(k) can be a wise choice for retirement savings.

A 401(k) is a defined contribution plan, meaning you are not guaranteed a specific income upon retirement. The plan allows the employer and employee to contribute to the employee’s 401(k). The amount of money you can contribute is generally set by the employer, who will only match a percentage of what you contribute.

The longer you remain at your job, the more vested interest you will have in your retirement plan. The method for determining your vesting is determined by the employer and is usually related to the number of years you have worked for them and how long you have been contributing to the 401(k). Usually, to become 100% vested, you will need to be employed for ten years. Check with your human resources manager to determine the vesting rules for your company.

One major problem with a 401(k) and any defined contribution plan retirement account is that you don’t know how much money you will receive when you retire. Your nest egg at retirement will be based on how much money you contributed to the plan, what your employer contributed, and the performance of the investments in your portfolio. Seek the help of a qualified financial planner to help you decide if you should move your investments to get more of a return for your money.

Benefits of this type of retirement account include:
• Contributions are taken out pre-tax, so they lower your taxable income rate
• Contributions are sheltered when you make them
• Funds are often taxed at a lower rate when you withdraw them at retirement
• Your contributions and earnings are protected from income tax until withdrawal, which means the funds have more potential to grow.

The most significant benefit of the 401(k) is that it can be moved if you change jobs, usually without any penalties. You may maintain the account as is (unless required to be removed by your employer), roll it over into another 401(k) account at your new employer, transfer it to an IRA, or make a withdrawal at the time. Remember that withdrawing before you retire may cause you to pay stiff penalties and income tax on the withdrawal.

Your 401(k) plan may be challenging to understand, but it doesn’t have to be. Speak with a qualified financial counselor to give you specific information about the 401(k) – details and explanations – to ensure you understand the benefits and potential problems of having this retirement account. Your financial planner can give you good advice, but you have to seek them out.