Know Your 401(k) and Retire Without Fear

When investing your money into your retirement, many workers and self-employed entrepreneurs enroll in 401(k) programs to save. This type of retirement savings account was being employed by workers in the early 1980's. This was deemed a great alternative to the basic retirement plans that were solely paid out by the employer. With 401(k), there is matching options for the employer, depending on how much the employee contributes to the plan.

The advantages of a 401(k) include lessened tax liability, hardship withdrawals, and the flexibility of the investment. As noted, the employer will match what an employee pays into the 401(k) each payday, with some companies having no cap to the limit. Roth IRA's are very similar, except that the Roth IRA does not have the tax benefits that the 401(k) investors have. The amount that an employee and an employer put into the investment cannot be taxed until a withdrawal or fund allocation is made.

401(k) programs have a maximum limit on employee pre-tax contributions, with the current 2011 year being $16,500. Employees 50 years of age and older are allowed an additional $5,500 per year until they retire. This is not the case in Roth IRA's, where there is no limit to contributions made by either the employee or employer.

These days, some employers decide to automatically opt-in new employees into the company's 401(k) program, making it possible for the individual to opt-out if necessary. When first introduced in the early 80's, some employers required a new employee to take part in the programs, so that there is no necessity for a retirement program exclusively funded by the company.

Employees who have invested in 401(k) programs and who are later terminated are eligible for an early withdrawal of funds with little or no penalty involved. Many people who retire early cash out their 401(k) to live off of or travel until they can begin to collect another sort of pension, or when Social Security payments begin to be dispersed.

There are many limitations and regulations that come from investing in a 401(k) program. Often, employers will have certified financial experts from the trading firm that they currently work with come in. This person will often sit down with each employee individually or as a group to determine goals, outlooks, and financial trends that may affect the value of the portfolio.

Historically, self employed people would not opt for a 401(k) program due to the difficulty meeting the high costs and and low contribution. This all changed when congress passed the Economic Growth and Tax Relief Reconciliation Act in 2001. This reduces contributing caps and also reduces the tax liability of the person if they were the sole proprietor of the business.

401(k) programs have been life changing for many people, especially frugal workers who capped out their investments every year, happy to see a nice return come retirement time. Some have floundered from one account to another, usually from employment instability or not many investments. For those who can invest many years into this plan, the retirement years could prove to be financially rewarding.

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