One of the first things that every financial advisor will recommend to clients planning for retirement is a 401(k) plan. This powerful retirement strategy offers numerous benefits like saving tax, and sometimes free employer contributions. If you want to understand what a 401(k) plan is and how it works, read the full blog below.

What is a 401(k) Plan?

A 401(k) Plan is a tax-qualified plan sponsored by many employers. It allows workers to tuck away a fraction of their paychecks before taxes are deducted for investment in different funds that can be profitable in the long term.

How Does a 401(k) Work?

When you sign up for a 401(k) plan, you decide to have a certain amount of your pay contributed to your retirement account automatically. The contributions are added to the plan on a pre-tax basis, so you don’t pay taxes on the money until you take it back out — generally in retirement. This tax-deferred growth is key to helping your investments compound much more effectively than they would in a taxable account. Plus, many employers even provide a matching contribution — which is basically free money.

1.Investment Options

The money in your 401(k) is usually invested in a range of options, such as mutual funds, index funds, and target-date funds. In most plans, you can decide how aggressive or conservative you want to be in saving for retirement based on your retirement goals and risk tolerance. We suggest consulting a trusted financial advisor like Saij Elle for women’s financial empowerment.

2.Withdrawals and Penalties

You can begin making penalty-free withdrawals from your 401(k) at age 59½. Withdrawals prior to that age generally have a 10% penalty and are fully taxable, except for certain exceptions such as financial hardship or disability. You need to start RMDs when you turn 73.

3.Roth 401(k) Option

Certain employers offer a Roth 401(k) as well, which is funded with after-tax money. That way, while contributions are taxable going in, qualified withdrawals in retirement are completely tax-free—a third very effective option for retirement planning.

Get the Best Financial Advice for Women

For most people, a 401(k) plan is an easy, straightforward way to save for retirement, especially if you get employer matching and make good investment decisions. At Saij Elle, we are committed to helping women create a solid financial future for themselves. We work for women’s financial empowerment. Book a consultation with us today.