After hours of reading different financial blogs, you know you need to get involved in a 401k, but you don’t know how to qualify for one. Typically a privately held corporation is entitled to set up 401k plans as a means to offer benefits to their employees. So if you are a full time employee at one of these privately own corporations who offers the 401k plan, you are qualify to enroll.
401k plans are a type of savings plan that help employees plan for their retirements. The companies arrange this benefit (as they get tax benefits for doing so) and a portion of a workers salary is diverted into an investment account, which is not to be touched until the worker retires or wants to cash out. Sometimes employers offer additional incentives (such as matching 50% of what the employee puts away in the account) to their employees’ savings, to help build their nest egg and to keep them motivated to continue working for the company.
Cash that is diverted by a qualified worker into a 401k plan is tax-deferred, meaning no income tax needs to be paid at that time. This can be helpful for those with high tax brackets to reduce their income tax payments.
If you are qualify to participate a 401k plan you should be aware that there are financial penalties for early withdrawal. Once the money is withdrawn, that amount will be added to your reported income for the year and can raise your tax bracket – meaning Uncle Sam will eat up a lot of your hard earn money. With these plans it is best to be patient and wait until age 70½ – the legal age for touching that money.
Self-employed individuals are also qualified to set up their own 401k plans being that you are your own boss of a privately held corporation, it is legal. Before making any financial decisions that will affect your way of living though, speak to your tax professional and financial planning advisor whether enrolling in this program is something for you. Remember there are other ways of investing in your retirement so look at other options as well – such as Roth IRAs, traditional IRAs, annuities, etc.