You are given the option of selecting the funds you choose
to invest in from funds list provided in the 401k, if your company offers a
401k retirement plan.
Your company will provide you with a funds list they use
for their plan and give you the opportunity to decide the type of investment
and the percentage to invest. Prior to taxes, your employee contribution will
automatically be deducted from your pay check.
Each employee can make a payment up to a certain percentage
of his or her pay into a 401k and some employers will match a percentage of
your contributions. Your contributions together with any matched contributions
are then invested into your selected funds.
Without being taxed, these funds will grow and can be
withdrawn when you reach the age 59 1/2. You must pay income tax on the withdrawn
funds at this time.
Before reaching the age 59 1/2, there are ways you can
withdraw your funds, but these withdrawals usually require a penalty along with
payment of taxes.
To save more money for retirement, some companies match
employee contributions to some extent, paying extra money into the employee's
401(k) account as an incentive for the employee.
On the other hand, the
employer may make profit sharing contributions into the 401(k) plan. As an
inducement to the employee, these contributions may vest over several years to
stay with the employer.
The 401(k) account generally stays active for the rest of his or her life, though the accounts must begin to be prolonged beginning at age 70-1/2 when an employee leaves a job.
The employee can "roll over" the account into a new 401(k) account hosted by the new employer or into an IRA if the employee takes a new job at a company that also has a 401(k) or other eligible retirement plan.
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