Logo
Talk to an Advisor
1-800-USA-1031

401(k) Plan

Learning Center Menu

401(k) Plan

A 401(k) plan is a type of employer-sponsored retirement savings plan in the United States. It allows employees to save and invest a portion of their paychecks before taxes are taken out. Taxes aren't paid until the money is withdrawn from the account.

Here are the key features of a 401(k) plan:

  1. Pre-Tax Contributions: The money that you contribute to a 401(k) plan generally comes out of your paycheck before taxes are deducted. This reduces your taxable income for the year, which in turn, reduces your overall tax bill.
  2. Employer Match: Many employers will match a portion of their employees' 401(k) contributions, up to a certain percentage of their salary. This is essentially free money and can significantly boost the growth of your retirement savings.
  3. Tax-Deferred Growth: The money in your 401(k) grows tax-deferred, meaning you don't pay taxes on any investment earnings until you withdraw the money in retirement.
  4. Penalties for Early Withdrawal: If you withdraw money from your 401(k) before age 59.5, you'll typically have to pay a 10% early withdrawal penalty, in addition to regular income taxes. However, there are some exceptions to this rule.
  5. Required Minimum Distributions (RMDs): Once you reach age 72, you must start taking required minimum distributions from your 401(k), which are then taxed as ordinary income.

There are two main types of 401(k) plans: traditional 401(k) and Roth 401(k). In a traditional 401(k), contributions are made pre-tax, and withdrawals in retirement are taxed. In a Roth 401(k), contributions are made after tax, but withdrawals in retirement are tax-free. The choice between the two often depends on whether you think your tax rate will be higher or lower in retirement than it is now.

Have questions?

We'd love to guide you through the 1031 process, let us know how we can help!

Name