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The 401(k) plan Defined

The 401(k) is an employer-sponsored retirement plan in which you deposit money directly from your paycheck pretax and invested into specified investments as a source for retirement.


It is a pretty simple investment strategy and it’s the best personal finance vehicle that you probably will ever have. There are many advantages with a few restrictions to 401k plans

The disadvantages are just the opposite. If you do contribute to a 401(k) you'll pay more in taxes without lowering taxable income. Suppose you are paid $2,000 in gross income a week and taxed at 25%. Compare that to contributing 10% to 401k pre-tax:  



The difference between the two is that without the 401(k) your paycheck is $150 more and over the course of 52 weeks this amounts to $7,800. On the flipside, contributing to 401(k) would have accumulated $10,400. This $2,600 difference is the true advantage. Keep in mind that a 401(k) is for retirement and it is the best personal financial vehicle available. If you are saving money somewhere else you will not be benefiting as much because all of that money invested would be coming from after tax income.

Defined contribution

401(k)'s have more than one plan type. The preceding section outlined a defined contribution plan. This type of plan is where your employer establishes the plan allowing you to make salary-deferred contributions on a pre-tax basis and/or post-tax basis. They can choose to make a matching contribution based on their guidelines or non-elective contributions to the plan if you're eligible. They may also add a profit-sharing feature to the plan. The earnings accrued in the account grow on a tax-deferred basis

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