401K

401K is a retirement savings plan which is set up by your employer where you contribute a percentage of your pre tax salary which is often matched by your employer. For a comfortable retirement social security won’t be adequate and 401K is one of the most popular retirement plan. The name 401K is got from a section of the IRA Internal revenue code created in 1978.

The advantage of 401K is that it is in small monthly investments and are made automatically from your paycheck by your employer so you won’t miss paying. It is tax deferred so you will not pay tax for the money you put in your 401K and so you are in lower tax bracket.you pay less tax now and more money will work for you . Usually the employer also puts in an amount depending on the plan and that means you are getting free money. You cannot withdraw it until you are 591/2 years old or you will have to pay taxes and10% penalty. It is advisable to start early so that you will be able to contribute the maximum allowed and the company will also match accordingly. The plan varies according to the employer and the maximum for 2005 are $14000 and 2006 are $15000. If you are 50 or older catch up contribution is $4000 and $5000 respectively with $500 increment limit indexed for inflation thereafter. This also has loan features where you can borrow from your money and will be paid-back through payroll deduction. You should pay back the principal and the interest which will be much less than many other loans.

You can choose the investment options according to the plan your choice of investment options varies with stock mutual funds, bond mutual funds stable value account and money market accounts. Some 401K plans limit the number of times you can transfer from one option to another. Some plan lets you to transfer monthly and some quarterly.

They are portable that is when you leave the employer you can transfer to the new employer it the new employers plan allows it or roll over to IRA or withdraw the money. Remember you should transfer to the new employers plan directly from old plan to the new plan . You can leave it with the former employer as well but you will not be able to contribute to it further. If you withdraw any balance you will have to pay the penalty. If you withdraw before you are 59 ½ years old you will have to pay penalty of 10 percent as well as taxes. Employee can stop contributions when he wants.

The income is protected by the employment retirement securities act. It is not federally insured.