401K Retirement Plans-401K Overview

Today, 401k retirement plans are among the most popular personal savings and retirement vehicles. Despite their ubiquitous nature, many employees know little or nothing about their own 401k plans. In this article, we will remedy the situation, by outlining the two different types of 401k plans, as well as the benefits of such plans. In addition some history of the 401k change in 1978.

There are two distinct types of 401k savings plans.

Traditional Plan

The first type of plan is known as the traditional plan. This plan started back in 1978 with the . Under the act, companies were able to deduct future compensation payments. These plans quickly became popular, and by the mid 1980s, a majority of companies in the United States offered some sort of deferred benefits package.

Roth Plan

The second type of 401k plan is known as the ROTH plan. Under the ROTH plan, taxes on plan contributions are paid up front. By making contributions with after tax income under the Roth plan, an employee does not have to pay any income taxes when a withdrawal is made later on.

Benefits for employers:

From the employers point of view, the 401k is a much better option than defined benefits plans. With the older defined benefits retirement plans, employers are required to make certain pre-defined retirement payments to employees. Under this system, it is up to the employer to figure out what payments need to be made, as well as managing those payments to maturity. In contrast, the 401(k) plan shifts much of this responsibility to the employee. The employee can decide how much he or she wants to contribute to the savings each and every year. Moreover, the individual employees have options on how to manage their savings. Employees can invest their 401k savings in any number of mutual funds, bonds, and even stock in the company which employs them. The only responsibility of the employer under the 401k is to match the contributions of employees and only if the employer opts to use a matching plan.

Benefits for employees:

From the standpoint of the employee, the 401k offers a much more flexible retirement savings plan. Income taxes can be deferred (as is the case with the traditional 401k), or paid up front under the Roth 401k. Furthermore, 401k plans tend to have much higher contribution limits than other retirement savings plans such as the IRA plan. Finally, some employers even allow their employees to borrow against their 401k savings. Home loans, for example, can be taken out against a 401k retirement plans, to be repaid later in post-income-tax dollars.