401(k) - A Very Popular Investment Plan

401(k) are becoming more and more popular as an investment plan option for employees. It may have a weird name, but 401(k) plans have done much for young people investing for their futures. The basis of the plan is that your employer takes a portion of your paycheck, and deposits it into a company-sponsored investment plan.

Many people confuse it with pension plans. These are plans in which your company contributes money to a retirement fund set up on your behalf. The problem is, you only get the money if you stay with the company until you retire. Then you receive a fixed, periodic payment.

The 401(k) investment plan (sometimes called 403(b) if you work for a nonprofit organization) lasts until you leave the company OR retire. At that time, you can roll it over to another retirement account, claim it early, or leave it where it is. If you decide to claim it early, you will be penalized and you will face income-tax liability charges.

Another great utility of 401(k) plans, is that some companies will match, dollar for dollar (or a percentage), the amount of money per paycheck you are putting into it. This is a great tool for young people in their 20s just starting a new career. If you don't believe me, then just look at the numbers:

* You turn 25 and you just got a new job.

* You put away $5,000 a year in your 401(k) plan.

* You earn an average of 8% yearly earnings on your money.

* After 10 years, you decide to stop putting way $5,000 and you just let your 401(k) money sit.

* When you retire at 65, you receive your money which is now almost $900,000.


Investing your 401(k) should not be taken lightly. There is much information you need to seek from your employer. They will typically have many different investment options for you to choose from. As a young investor, you may not know which investment plan to go with. My advice is to keep it simple.

There are complicated plans out there, but your best bet is to put most of it in a large company U.S. stock fund. An example would be the American Funds American Mutual A Fund or the T.Rowe Price Equity Income Fund. The information for which fund to choose is all over the internet.

I would recommend you talk to your company about the various choices you have. They should provide meetings about this information, and if they don't, ask them to provide some. Your future depends on you learning and fully understanding all your options.


How much money can you save in your 401(k) plan?

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