401k Account Definition
A 401k plan is a retirement plan that allows employees to contribute pre-tax earnings to a group company account. The 401k account or the funds in the account are invested for the employees in stocks, bonds, or money market instruments. These contributions are then taxed as they are withdrawn when the employee decides to retire. Often times there is an employer contribution percentage that is associated with the employee contributions.
401k plans have several benefits to investors or employees. First of all, it allows employees to contribute pre-tax earnings. This allows the fund to make more over time even if it is taxed when withdrawn. Generally, it is better to pay taxes later and contribute more to a fund up front.
Another great thing about 401k plans is that they invest with a pool of money from all the employees in that company with a 401k plan. Like the pre-tax earnings this allows the fund to make more over time than if one employee were investing for him/herself. This type of fund is not only contributed by the employee, but often times by the employer as well. Again this allows an employee to max his 401k benefits, and gives him/her a wonderful retirement. A disadvantage is the fact that there is only a certain amount that you are allowed to contribute. It limits for the years 2009 and 2010 the amount is equal to $16,500.