The 401K retirement plan is the typical retirement plan offered by many companies to it’s employees and is funded by contributions from the employee and, in some cases, a matching contribution from the employer. One of the major benefits is that the money is taken from the employees salary before taxes are deducted and the fund accumulates tax free for as long as the money remains in the account. A 401K can be created by almost any tax exempt organization or business.

This plan gets it’s name from the Internal Revenue Code of 1978 and is administered by the Employee Benefits Security Administration which is part of the Department of Labor.

The 401K Retirement plan has many advantages and the most important is that it is funded with pre tax dollars which also reduces the amount of taxes the employee has to pay on his salary each paycheck. The fund grows tax free including all company contributions. Also the convenience of paycheck deductions is a major plus for many people.

Although you may only contribute a small amount to a 401K, the amount that is compounded over 20 or 30 years can be quite substantial especially with company matching funds. Usually the employee has choices as to where the money is invested and if you change companies, everything you have accumulated (and that is vested) can be rolled over into your new companies 401K.

The 401K plan is a personal investment plan and, therefore protected by pension laws which include protection from garnishment by any creditors that you owe money too. However, it is not protected from child support cases.

Although the 401K plan is generally advantageous there are actually some disadvantages. One is that it is very difficult to withdraw money before age 59 ½. Also, 401K’s are not insured by the Pension Benefit Guaranty Corp. If your company contributes to your 401K, there is usually a certain wait period until the company contributions are vested. According to the rules they must be either graded over 6 years or vested 100% over 3 years. This means that if you leave the company before all the contributions are vested, you lose that amount.

Typically, employees can choose from an array of mutual funds in which their 401K contributions can be invested. There is usually a low, medium and high risk option (or several). Typically you can choose from money market funds, stocks, bonds and treasuries. You can change the amount you are contributing during certain periods as well as stop contributing all together.

The average 401K retirement plan is non aggressive with their investments. Usually stocks that have outperformed other investments over time are considered. Remember, the 401K is a long term investment plan so it should be able to withstand stock fluctuations over the long term.