Part 2 : What is a 401k Plan and how you can save taxes by contributing to a 401K Plan?

 

Roth 401 k Contributions :

Many employers offer Roth 401 (k) contributions that you can contribute. With the Roth 401 (k) contributions, all funds grow tax-free. Also, you get to take all withdrawals tax-free during your retirement years.

When you should choose pre-tax vs after-tax contributions :

When you earn the most during middle and late stages of your career, you should make pre-tax contributions to the account.

Make Roth contributions during the years when your income is not so high.

Employer Matching Contributions

With a matching contribution, employers puts money into the 401 (k) account if you are also putting money into it. As an example, they may match dollar to dollar for the first 3 % of the pay.  etc.

Vesting schedules 

Employer matching contributions are subject to vesting schedule. If you withdraw the funds before it is 100% vested, you will be able to keep only part of what the company has put it in for you.

Discrimination testing rules

Employers need to go through few tests to ensure that the 401 (k) plans do not benefit only the highly compensated employees. Each plan goes through testing called ‘Safe Harbor Plan’