401K plan is a qualified retirement plan which allows individuals to save funds required for post retirement life. There is generally no minimum age requirement specified for contributing unless it is mentioned in the plan itself. In fact, the earlier you start the better benefits you reap.
However, every plan details out some standards which make individuals eligible to participate in the plan. One of the factors could be number of years of service in the firm or number of hours contributed by the employee.
The funds contributed by both the employees and the matching contribution of the employers grow in a tax deferred environment. This means while the employer calculates the tax, the contribution to 401K plan is deducted from the wages and is tax-free. When you withdraw from the funds after 59.5 years, you pay the normal income tax rates as of that year. In case you withdraw earlier, you pay an additional 10 percent penalty. Hence, care should be taken before entering into a financial contribution commitment to the 401K plan as early withdrawals may result in unnecessary financial loss or penalties.
The contribution of the employee to the 401K plan is 100 percent vested. However, the vesting period of the employer’s contribution may differ and employees may not be fully vested in all cases immediately. While some of the plans make employees are 100 percent vested on the day they join the plan, others are required to serve the firm for a pre-determined period before they become 100 percent vested for the employer’s contribution also.
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