401k plans can allow you to save up some money for your future and get a tax break while doing it. But before you start contributing it is important to know the 401k plan facts so that you know exactly what you are investing into and what your options are.
Let’s start with the basics, what is it? Basically whenever you invest into a 401k plan you are depositing before tax dollars into the account and are able to invest it without paying taxes on the interest until you make a withdraw.
There is a maximum amount that you can deposit into your account every year, for 2010 this amount is $16,500 if you are under the age of 50 or $22,000 if you are over the age of 50.
So, what happens if you want to get money out? You are allowed to make a withdrawal from your 401k at any time; however once you do you will have to pay taxes on the money. In addition to that you will also have to pay an early withdrawal penalty of 10% if you are under the age of 59 ½.
One other option is to take out a loan from your 401k retirement plan. A loan from your 401k allows you to withdraw money from your account, without being taxed or paying any penalty, however you have to pay the loan back with interest.
Usually taking out a loan is a much better option than taking a withdraw, but if it is going to take you a long time to pay it back it could actually be a worse option. This is because most plans with prevent you from depositing more money into the plan if you have a loan out.
So if you take out a $5,000 401k loan and it takes you 1 year to repay it that means you missed out on depositing up $16,500 into the plan. All this to save you from making a $5,000 withdraw. This is why it is important to consider all facts before making your final decision.
Tags: 401k Facts, facts on 401ks