What is a 401(k) Plan

What is a 401(k) Plan

Recently, many classmates who are new to the workplace have come to consult the giant panda. Does the 401(k) Plan provided by the company need to be enrolled (participation), and what should I do if I may return to China in the future? The giant panda is here today to give you a good popularization of the 401(k) Plan and some related issues that everyone cares about.

First of all, what exactly is a 401(k) Plan?

401(k) Plan is simply a retirement benefit plan provided by American companies for employees. It can be understood as similar to China’s social security, but it is very different from China’s social security, which we will explain in detail below. In 1978, the U.S. Congress passed a bill called the Revenue Act of 1978, which had a section called Section 401(k), which allowed employers to create a tax-deferred savings plan for employees, and this pension could be Fund stocks and other investments. From the 1980s, this new fully funded pension savings system developed rapidly, and most American companies began to adopt this social security plan. Today, the 401(k) Plan has more than $5.8 trillion in assets.

For students who are not working in for-profit organizations, there are similar retirement insurance plans in non-profit organizations and government departments.

403(b) is a retirement benefit plan provided by nonprofit organizations such as schools, hospitals, churches, etc. to their employees.

457 is a retirement benefit plan offered by state or municipal governments to employees.

The above two are retirement benefit plans similar to the 401(k) Plan, and there is no essential difference from the 401(k) Plan.

What’s in a 401(k) Plan

A 401(k) Plan is deducting a portion of your income from your salary and deposits it into an account to prepare for your life after retirement. In addition, your employer can also put some funds into the employee’s 401(k) Plan according to a certain proportion. Generally, the employer will make a corresponding match/employee match according to the % that the employee has put in for himself. Of course, not all employers choose to put money into their employees.

For example, if your monthly income is $3,000 and you choose a 10% employee contribution, then your monthly payroll will automatically deposit $300 into your 401(k) Plan account if your employer chooses 50% match, then your employer will also automatically deposit $300 * 50% = $150 into your 401(k) Plan account.

[Note]: The frequency with which your employer and you put into your 401(k) plan may not be the same. The employee automatically puts a part into the 401(k) Plan when they are paid every month, but the employer’s employee match may only be released once a year, and it is possible that if you leave the company and the company does not release the money, the employer will No employee match is provided. For example, the company put the total number of employee matches in 2018 in January 2019, and you quit until November 2019, then your 401(k) employer in 2019 will not match (because in January 2020 the employer released When entering the total number of employee matches in 2019, you are no longer in the company). Therefore, everyone should carefully read the specific regulations of the employee match, and estimate the time of job-hopping, to avoid losing a lot of benefits.

So is a 401(k) Plan mandatory? 401(k) Plans are not mandatory for employees, but most 401(k) Plans are for employees who are eligible to participate in a 401 (k) Plan. Employers are responsible for notifying employees that you have the option to participate. right.

If you choose to participate in the 401(k) Plan, the part that needs to be paid to the 401(k) Plan will be directly deducted from each payroll, so the part of your 401(k) Plan salary is not tax-deductible.

So to sum up, the 401(k) Plan is to let everyone put part of the salary that should be taxed now into a fund that does not need to pay tax now (pay tax later), and this fund can also be used for investment!

By Master James

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