What is a 401(k) Plan and how does it work?

A 401k Plan is a defined-contribution retirement account that allows employees to save a portion of their salary in a tax-advantaged manner. The money earned in a 401(k) Plan is not taxed until after the employee retires, at which time their income will typically be lower than during their working years. 401(k) Plans also allow employers to match a portion of the contributions made by the employee, helping to grow their retirement funds even faster.

Is it worth having a 401(k) plan?

Generally speaking, 401(k) plans can be a great way for employees to save for retirement. However, whether a 401(k) plan is the best option available will depend on the employee’s individual goals and circumstances. All else being equal, employees will have more to gain from participating in a 401(k) plan if their employer offers a more generous contribution-matching program.

How much of my salary can I contribute into a 401(k) Plan?

The amount that employees can contribute to their 401(k) Plan is adjusted each year to keep pace with inflation. In 2020 and 2021, the limit is $19,500 per year for workers under age 50 and $26,000 for those aged 50 and above. If the employee also benefits from matching contributions from their employer, then the combined contribution from both the employee and the employer is capped at the lesser of $58,000 or 100% of the employee’s compensation for the year.

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