Retirement - Question62

We have a 401(k) plan at work and I haven't participated because I just don't understand it. It seems so complicated. Would you explain what a 401(k) plan is and how it works in simple terms so that I can understand it?

A 401(k) plan is a voluntary retirement program sponsored by your employer. It provides you with an opportunity to save for your retirement through payroll deductions, which are made before taxes are withheld. In addition to deferring taxes on the amount of your contributions, the earnings on these amounts will compound even faster than they would otherwise because all taxes are deferred until you start withdrawing them from your 401(k) retirement plan.

Some companies match employee contributions up to a certain amount or percentage. This is an excellent opportunity to double your money instantly. According to Kiplinger’s Personal Finance magazine, approximately 25% of eligible employees do not participate in their companies’ 401(k) plans.