What is a Traditional 401(k)?

There are numerous accounts that individuals can set up to prepare themselves for retirement. One of the most popular retirement accounts that individuals use today is it the traditional 401(k) plan. The traditional 401(k) plan works by allowing employees to contribute a portion of their salary to a retirement fund. The employer also contributes an amount to help the individual build with their retirement fund quickly.

Almost every organization and business has the opportunity to establish a 401(k) plan for their employees. Incorporated businesses, limited liability corporations, partnerships, sole proprietorships, and S corporations all have the ability to create a traditional 401(k) plan.

There are certain eligibility requirements for individuals who are interested in establishing a 401(k) retirement plan. The first requirement is that the person must be at least 21 years old. In some cases, an individual must work a certain amount of time or hours for an employer before they are allowed to participate in the plan. Individuals who establish a traditional 401(k) plan with an employer and then change jobs generally have three options. They can choose to take their 401(k) out, roll it over into a new 401(k) with their new employer, or deposit the money in an IRA.

There are numerous benefits to establishing a 401(k) plan. One of the main benefits is that employees have the opportunity to suspend any current income taxes on the money that they save. Individuals do not have to pay taxes on their saved money until withdrawal.

In some cases, a person may establish a Roth 401(k), which calls for an immediate payment of taxes so that there are no future taxes involved with withdrawal. Another advantage is that employers will often match the contributions of the employee. This allows the person to build his or her retirement nest egg quickly.

There are some downsides to investing in a traditional 401(k) retirement plan. One potential drawback is that most employers impose severe restrictions on an individual's ability to withdraw money. Individuals who withdraw their money early are subject to financial consequences such as having their money heavily taxed. Over the years, more employers have established plans for individuals to take loans from their traditional 401(k) plan without suffering some of the steeper consequences of early withdrawal.

Unfortunately, there are limits on the amount that employers can contribute to an individual's traditional 401(k) plan. Individuals who are over the age of 50 have higher limits. The higher limits are called catch-up contributions and were instituted to help older individuals retire at an acceptable age.