What is a 401k Plan?
A 401k plan is an investment account set up by your employer that lets you invest in stocks, bonds, and mutual funds. When you contribute to your 401k plan, a portion of your salary is deducted before taxes are applied. The difference between your taxable income and the 401k plan’s contributions is called a brokerage commission. If you are not aware of the fees associated with brokerage accounts, you may not understand how they affect your return.
Your employer may offer a 401(k) plan as part of its benefits package. In addition to allowing employees to set aside a portion of their salary for retirement, a 401(k) plan also allows them to contribute to a separate account without incurring additional taxes. Most employers offer matching programs whereby the employer matches your contributions up to a certain amount. You may want to consider signing up for one of these programs if you want your savings to grow faster.
401(k) plans have several investment options. Employees can choose from a wide range of stock and bond mutual funds. They may also be able to choose target-date funds that reduce the risk of investing as an employee approaches retirement age. Another option is to choose an index fund that mimics the performance of a particular stock index. Unlike a traditional mutual fund, an index fund purchases all securities in the index and only adds or subtracts investments when the index changes.