How Do 401ks Work?
There are many 401ks out there managed by many different companies. When the management company receives money from the investor (directly out of our paychecks), they invest it for us along with additional money from other investors. As the investor, you can chose which funds you want to be a part of, or how aggressively you�d like to invest.
When signing up for your plan, you will receive a packet of information from the 401k management company that your employer uses. This packet will tell you all the ways you can invest your money -- maybe all in technology stocks, maybe very versified with a little bit of everything, or maybe all bonds where your return is not as high, but you know your money will be safe. This is YOUR decision. You get to make all the calls, while having your plan managers do all the hard work like researching investments or submitting appropriate reports and forms to our beloved IRS. Most plans allow you to change how you�d like to invest on a quarterly basis.
Many (but not all!) companies offer a 401k match to employees as an additional benefit. This means that they will match a fixed percentage of what you invest. This also means free money � our favorite words. Some companies match 100% up to a certain amount, others match 50%, 10%, or they don�t match at all. You can invest as much or as little as you�d like each year. For 2003, the annual max is $12,000. This includes your employer match.
Even if the company does not match your contribution, contributing to a 401k plan is still an excellent way to invest in your future while avoiding taxes. (Please note that you will pay taxes when you have retired and want to close the account. However, this is still a big savings in taxes.)
The benefits of joining a 401k plan are innumerable. Even if you can only contribute a little each month, it will be well worth it when you can buy the nicest magnetic map for the back of your Winnebago due to your years of smart investing.
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