Posts Tagged ‘defined contribution plan’

A Defined Contribution Plan is…

Tuesday, June 30th, 2009

A defined contribution plan is a retirement plan in which the company you work or you (sometimes both) put money into the employees plan sometimes at a rate, such as 5% of annual income.  That money is generally invested on the employee’s behalf.  At the time of the withdrawal, the amount that the employee will receive is not guaranteed because it fluctuates with the investments.  An example of a DCP is a 401(k) plan.

Why should you take money out of your check for a 401k when you won’t be retiring for a long time?

Monday, June 15th, 2009

If you just started earning your own money recently, don’t you deserve to spend it all?  Although you did earn it and certainly can do whatever you want, it may not be the wisest decision to spend every last dime. Lucky for you, there’s an incredibly easy alternative, and it’s called a 401k.

When you participate in a 401k plan, it basically takes money out of your paycheck and puts it into an account for your retirement fund.  401ks are part of a group of retirement plans known as “defined contribution plans,” because the amount that can be contributed to your retirement is defined either by you (the employee) or your boss.  A great thing about the 401k is that when a certain percentage is deducted from your paycheck to put into that retirement savings account, it reduces your take-home pay before taxes are calculated. This means that instead of giving a portion of today’s salary away to taxes, you are putting some of it away in a retirement account instead. Then you pay taxes after you retire when your income and tax bracket is lower.

Sounds too good to be true? 401ks are great, but a main drawback is that if you do want to withdraw the money in your retirement account before you are 59.5 years old, you’ll have to pay taxes on it PLUS a 10% penalty fine to the IRS. Although retirement may sound like something in the very distant future for you, it is something to think about, and having a 401k Plan is an effective and pretty effortless way to have a long-term plan.