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What Is a 401(k) Plan?
A 401(k) plan is a tax-advantaged, defined-contribution retirement account offered by many employers to their employees. It is named after a section of the U.S. Internal Revenue Code. Workers can make contributions to their 401(k) accounts through automatic payroll withholding, and their employers can match some or all of those contributions. The investment earnings in a traditional 401(k) plan are not taxed until the employee withdraws that money, typically after retirement. In a Roth 401(k) plan, withdrawals can be tax-free.

How 401(k) Plans Work
There are two basic types of 401(k) accounts: traditional 401(k)s and Roth 401(k)s, sometimes referred to as a "designated Roth account." The two are similar in many respects, but they are taxed in different ways. A worker can have either type of account or both types.

Contributing to a 401(k) Plan
A 401(k) is what's known as a defined-contribution plan. The employee and employer can make contributions to the account, up to the dollar limits set by the Internal Revenue Service (IRS). By contrast, traditional pensions [not to be confused with traditional 401(k)s] are referred to as defined-benefit plans—the employer is responsible for providing a specific amount of money to the employee upon retirement.3

In recent decades, 401(k) plans have become more plentiful, and traditional pensions increasingly rare, as employers have shifted the responsibility and risk of saving for retirement to their employees.

Employees are also responsible for choosing the specific investments within their 401(k) accounts, from the selection their employer offers. Those offerings typically include an assortment of stock and bond mutual funds as well as target-date funds that hold a mixture of stocks and bonds appropriate in terms of risk for when that person expects to retire. They may also include guaranteed investment contracts (GICs) issued by insurance companies and sometimes the employer's own stock.

Contribution Limits
The maximum amount that an employee or employer can contribute to a 401(k) plan is adjusted periodically to account for inflation. As of 2020 and in 2021, the basic limits on employee contributions are $19,500 per year for workers under age 50 and $26,000 for those 50 and up (including the $6,500 catch-up contribution).

If the employer also contributes—or if the employee elects to make additional, non-deductible after-tax contributions to their traditional 401(k) account (if allowed by their plan)—the total employee/employer contribution for workers under 50 for 2021 is capped at $58,000, or 100% of employee compensation, whichever is lower. For those 50 and over, again for 2021, the limit is $64,500.

Employer Matching
Employers who match their employee contributions use different formulas to calculate that match. A common example might be 50 cents or $1 for every dollar the employee contributes up to a certain percentage of salary. Financial advisors often recommend that employees try to contribute at least enough money to their 401(k) plans each to get the full employer match.

Contributing to a Traditional and Roth 401(k)
If they wish—and if their employer offers both choices—employees can split their contributions, putting some money into a traditional 401(k) and some into a Roth 401(k).

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#401K #401KProblem #Retirement
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DISCLAIMER:
This video is for entertainment purposes only. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.

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