Basics of 401(k) Retirement Plan

In this article, you will get to know all about the 401(k) retirement plan and how it can benefit you.

What Is 401(k)?

A 401(k) plan, popularly known as an employer-sponsored retirement and investment plan named after a section of the United States Internal Revenue Code. It is a defined contribution plan, which means it is completely up to the will of the employee as to how much they are willing to contribute to their account, subject to annual limitations.

Contributions made by the employee are directly withdrawn from their 401(k) account and invested in the funds of their choice. Employees can invest the money saved in their 401(k) account in one or more mutual funds offered by the plan.

How Does 401(k) Work?

 In general, there are 2 types of accounts under the 401(k) plan, mainly differentiated based on how they are being taxed.

Traditional Vs Roth Account

401(k) Investment Options

A typical 401(k) plan offers a wide range of investments, but any single plan might or might not offer all possible types of investments.

Even though a 401(k) investment plan comes with a variety of options like:

• Company stocks
• Individual stocks
• Bonds
• Securities
• Variable annuities and much more.

Still, the one that rules the 401(k) investment opportunities is Mutual Funds.

Types Of Mutual Funds Under 401(k) Investments

Mutual funds are the most common 401(k) investment options. The most common Mutual Funds investment options include:

Range Of Mutual Funds Under 401(K) Investments

The abovementioned mutual funds range from conservative to aggressive, along with many grades in between. All the major financial companies use these similar terms while talking about the Mutual Fund range.

Let us look at the different range of fund types offered under 401(k) investments

How To Build 401(k) Portfolio?

Instead of investing all your money in one particular fund, it is always considered better to allocate your money around different funds. Allocation of money in different funds increases the probability of better returns. However, it is up to you to decide where and when to invest.

Here are some of the key factors that should be considered before you invest in a 401(k) plan

1. Financial Goals

   It is important to differentiate between how much money you are willing to invest and take the risk upon. The sooner you start investing, the less you have to save to reach your goals later in life.

2. Diversification Of Funds

   Diversification helps in capturing better returns in the end. Investing in mixed investments like stocks, bonds, commodities, and others, while maintaining balance is the best way to diversify your portfolio.

3. Assessing Risk Tolerance

   One should always plan to take risks suitable to their portfolio. Higher the risk, more chances of profits and losses equally.

4. Time Horizon

   More time until you need the money means you can take more risks and generate higher returns. This means that you should invest in such a way that you have ample time to recover if at loss.

5. Minimize Expense Ratio

   You should avoid buying funds with high fees. It is always recommended that in case of options available, one should opt for the lowest cost option, which is an index fund.

The Bottom Line

401(k) retirement plan is beneficial not just at the time of retirement but throughout. It is an investment option that can help you not just to save your money but also grow it over years.

As the 401(k) investment plan comes with dynamic features and benefits, you need to make a wise and informed decision to avail of maximum benefits at the end.