Re: what is a 401k plan?

On Mon, May 31, 2004 at 10:16:24AM +0100, Jose Alves de Castro wrote:
> Hello, everybody.
> 
> I've seen this (or something similar) on some job adds:
> 
> > we offer a generous 401k plan
> 
> They call it "generous", so it should be a good thing, but I have no
> idea whatsoever of it means... :-)
> 
> Can anyone enlighten me, please? :-) What is a 401k plan? :-)

A 401k is an American retirement savings plan.  The basic idea is that
you can have up to 10% of your salary withheld from your paycheck,
which is then invested in various things like stocks, mutual funds,
fixed-income accounts, etc.  The money is withheld pre-tax; you're not
taxed on it until you retire, when presumably you're income will be
less than when you're working.  And because of that, there are
penalties if you try to use the money before you reach retirement age.

Employers can match the amount that you withhold, and the "generous"
part refers to how much they match.  One company might match 50% of
the first 5% you withhold; another might match 100% of the first 6%.
There's some limit to how much they can match, but I forget what the
cutoff is.

Other things to look into are how long you have to be an employee
before you can start using the 401k plan (some places make you wait 6
months or a year) and what their vesting policy is.  The money you add
to the plan is always yours, but sometimes you have to wait to get all
of their matching funds.  For example, if you left after one year you
might only get 25% of their funds, 50% after 2 years, and so on.

Walt

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