Many employers are sponsoring a retirement savings plan specifically intended for their employees. Also, under these plans, which are commonly referred to as defined contribution plans, employees can save money toward their retirement and this is on a tax-deferred origin - that is, one doesn't have to pay state or federal income tax on savings or investment earnings until such time that the money at retirement will be withdrawn.

 

Most individual's taxable income as well as tax rate is significantly lower at retirement compared to the amount during employment. Ultimately, they would end up paying less in terms of taxes on their savings. In addition, the most common kind of employer-sponsored retirement or savings plans are known as 457, 401(k) or 403(b) plans. These were names in accordance with the IRS codes that administrate them - and the thrift savings plan. Each of these plans caters to different target audience. The 401k plan is being offered to workers or employees of a public or private company that is being managed for a profit.

 

The 401K Plans - How Do They Work?

 

Foremost, money is deducted straight from your paycheck prior to withdrawing of taxes, which would ultimately decrease your taxable income and as a consequence, lowers your taxes. In addition, some plans permit you to contribute cash on an after-tax setup as well. It's important that you confirm with your financial advisor for several cases when this may be more advantageous in your situation. Many company owners started offering 401(k) plans that combine several features of the usual 401(k) with other plans.

 

Are you Eligible?

 

Some company owners apply a waiting period prior to participating in a 401(k) - from 1 month to 1 year - while others would permit employees to start making immediate contributions. Likewise, it's not extraordinary for an employer to simply wait until their employees pass a waiting period before they start making contributions to their accounts. This is the reason why you have to verify your benefits enrollment materials so you could immediately determine the waiting periods that must be met.

 

Contribution Amounts

 

The government sets a maximum amount that can be contributed to 401K plan in a particular year and such amount is commonly adjusted upward so as to account for inflation. Additionally, employees who are 50 years old and above could also pay their "catch-up contributions". Many plans allow employees to contribute up to a certain percentage to cover compensation. For additional information, try reading the data about target date retirement funds in the given link.