What is the 401k retirement plan?

Since its inception in 1978, the  401k has become one of the most popular pension plans in the United States . Many people depend on the money they have invested in this plan to take advantage of their retirement years  . But do you know what the 401k is and how it works?

The 401k is a  fund that allows employees to move part of their salary into a long-term investment . This plan has several benefits, such as tax incentives, high contribution limits in terms of values ​​and age, flexibility, among others.

In this article, you will find out how the 401k works, the main benefits, the differences in the Brazilian private pension plan and which companies offer this plan in Brazil. Check it out below!

Contents hide ]

  • 1What is the 401k retirement plan?
  • 2How does the 401k work?
  • 3What are the benefits of the 401k?
    • 1Benefits of the 401k plan for companies
    • 2Benefits of the 401k plan for employees
  • 4How common is the 401k in US companies?
  • 5What is the difference between the 401k and the Brazilian private pension?
  • 6Which companies offer the 401k to their employees?

What is the 401k retirement plan?

The 401k plan   was created by Congress in 1978 to  encourage people to save money for retirement . At that time, the Tax Reform Law was approved and authorized the creation of a pension plan with less taxes for employees of private companies.

The plan was called the 401k because of the section number (401) and paragraph (k) of the Internal Revenue Code .

Whoever is a beneficiary of the 401k plan can  withdraw the full amount whenever they want . However, if the collaborator uses the money before the age of 59, he will have to pay a  10% fine  to the IRS. However, if the person has one  qualified exception  ( qualifying exception ), do not have to pay a fine. This exception is usually granted for those who need to pay non-refundable medical expenses, for example.

In the 401k plan, one can  control how money is invested . Most plans offer a spread of mutual funds consisting of stocks, bonds and money market investments. Trading papers on the  New York Stock Exchange , for example, is a valid and even recommended alternative.

How does the 401k work?

The 401k is a  retirement plan that allows an employee to use part of their salary for long-term investments . This plan is called  qualified  because it is eligible for special tax benefits under the guidelines of the US Department of Federal Defense (IRS).

Qualified plans have two versions:  defined contribution  or  defined benefit . The 401k is a defined contribution plan, meaning the available balance is determined by the contributions made to the plan and the performance of investments.

The contracting company may  cover a part of this contribution , but this is not mandatory. Earnings from the traditional 401k plan are not taxed until the employee withdraws all the money, usually after retirement.

It is possible to  deposit up to 15% of salary  into the account monthly, but this amount may be limited by the company. The IRS also sets a limit on these funds — you cannot exceed the amount of  $18,500  per year.

In summary, the 401k consists of applying the money that should be withheld at source to pay income tax. So, instead of paying tax, the amount is redirected to a long-term investment , which does not incur any tax until withdrawn.

What are the benefits of the 401k?

The 401k plan offers several benefits for companies and employees. See below what are the main advantages for each of the parties involved.

401k Plan Benefits for Businesses

  • Tax credits and other incentives to start a plan can  lower costs ;
  • a good pension plan can attract and  motivate employees ;
  • the plan’s assets are  tax free ;
  • multiple flexible plan options are available;
  • company contributions are  tax deductible .

401k plan benefits for employees

  • More  financial security  in retirement;
  • it is easy to make contributions through payroll deductions;
  • employee contributions may reduce current taxable income;
  • contributions and investment gains are not taxed until distributed;
  • receiving  interest compounded  over time allows regular small contributions to increase the sum that will be withdrawn upon retirement;
  • Retirement assets can be  transferred  from one company to another.

How common is the 401k in American companies?

The corporate benefits have gained much attention in recent years for American workers. So much so that a survey by Glassdoor showed that 57% of American professionals see a company’s benefits package as a decisive factor when considering a selection process. And among the corporate benefits most sought after by Americans are pension plans, or 401k.

Data from a survey by the Society of Human Resource Management (SHRM) show that 71% of American professionals value companies that have this type of incentive . He is second only to health plans (95%). But it is way ahead of education aid (17%), welfare benefits (11%) and flexible hours (29%).

That’s why about 65% of American private companies offer a 401k plan to their employees – whether they are with or without additional contributions.

What is the difference between the 401k and the Brazilian private pension?

There are some differences between the rules of the Brazilian private pension plan and the 401k plan. In the Brazilian private pension, it is possible to withdraw the money at any time . The longer the money is in the fund, the greater the return on investment. However, if the redemption is carried out too early, the tax rates will be higher.

In the 401k, if a person withdraws money before age 59, they will have to pay not only taxes, but also a 10% penalty. Furthermore, in the 401k, tax collection is progressive, and the contribution models are similar to those of the Brazilian Free Benefit Generator Plan ( PGBL ).

Generally,  private pension income in Brazil follows the CDI value . In the United States, as the fund is supervised by the contracting company, it is common to hire managers to manage the 401k. They send email updates about the plan, present the profitability and help with employee requests.

Which companies offer the 401k to their employees?

Some multinational companies offer the  401k  as a benefit to Brazilian employees. See which companies are adept at the North American private pension plan:

  • Google;
  • Coca-Cola Company;
  • Adobe;
  • Bayer;
  • Netflix;
  • Microsoft.

Now you know how the 401k plan works  , you know the benefits and rules of the American pension fund. So how about finding out more about  Wall Street ? Find out the history of this famous street and see why it became so popular around the world!

by Abdullah Sam
I’m a teacher, researcher and writer. I write about study subjects to improve the learning of college and university students. I write top Quality study notes Mostly, Tech, Games, Education, And Solutions/Tips and Tricks. I am a person who helps students to acquire knowledge, competence or virtue.

Leave a Comment