What is a 401k?

I think what happens after retirement can be a formidable chapter in one’s life. We get so accustomed to the usual routine that it’s terrifying not knowing what do and worse – not having the money to do what we want.

Enter 401k plans.

The 401k retirement plan is a great opportunity for us, the employees, to be able to set aside passive savings and let it accumulate for as long as we work for the company. In other words, it’s a retirement savings plan which is fully covered by the employer.

How Does 401k Work?

  • Our paycheck gets deducted with a certain amount depending on which plan is established between us and the employer
  • Employees must meet eligibility requirements to avail of the 401k plans
  • Taxes are then taken out once the money is withdrawn from the account
  • Most employers also match contributions
  • 401k retirement plans can be individually-designed or IRS-approved
  • Penalties are incurred if the money is withdrawn before the set retirement age

How Did 401k Start?

We have to give credit where credit is due. And Ted Benna is the one who spearheaded the 401k plan – by accident.

In 1978, there was a Revenue Act wherein lawmakers wanted the company executives to limit their access to cash-deferred plans since the companies wanted to take advantage of these plans by allowing more money to be accumulated. That’s when Ted Benna made his own interpretation that gave rise to the 401k plan in the 1980s. Back then, only large companies offered these to employees. However, 94 percent of private companies offer them to employees today.

401k Eligibility Requirements

Generally, employees are qualified when they meet these requirements:

Employees must be 21 years of age

Employees are excluded when they haven’t reached the minimum age requirement of 21. But there is no maximum age requirement. Let’s say, for example, an employee’s plan can’t be revoked if the employee reaches the age of 100. That means, there is no limit as long the employee is still working for the company.

Employees must work for the company for at least a year

One year of service in the company means the employee must achieve a minimum requirement of 1,000 hours of service in a span of a year. However, some employers can have the leniency of requiring 1,000 hours of service in a span of less than a year.

Why do I think 401k plans are beneficial?

Since the birth of 401k, we now see our future after retiring as clear as day. I personally believe this gives employees a chance for squirreling away some money for the rainy day. As we all know, the economy’s volatility can have a huge impact on how we live. What we can afford today might be too much tomorrow.

401k plans allow employees to adhere to saving a meager amount in every paycheck. Instead of wasting away our money on the daily needs and wants, we can breathe a sigh of relief knowing that our retirement plan is a reward worth having in the end.