Understanding 401k Plans

A 401k is an employer-sponsored retirement plan named after a section of the internal revenue code. It allows employees to save pre-tax money for retirement, deferring taxes until withdrawal. Employers often match contributions, providing additional benefits. However, early withdrawal before age 59.5 incurs a penalty. The plan offers tax deferral and potential employer contributions, making it a valuable retirement savings tool.

What is the origin of the name '401k'?

• It is a random number assigned by the government.

• It is the number of benefits it provides.

• It refers to the section of the internal revenue code.

• It is named after a famous economist.

What is the primary benefit of contributing to a 401k?

• You receive a bonus from the government.

• You can withdraw money anytime without penalties.

• You can save money for retirement before taxes are deducted.

• You get a higher interest rate than other savings accounts.

When are taxes paid on a 401k account?

• Never, it is a tax-free account.

• When you withdraw the money after retirement.

• When you contribute to the account.

• Every year as the account grows.

What is a potential advantage of tax deferral in a 401k?

• You can avoid paying taxes altogether.

• You can use the money for any purpose without restrictions.

• You might be in a lower tax bracket during retirement.

• You receive a tax refund every year.

How do employer matching contributions work in a 401k?

• Employers match contributions only for high-level employees.

• Employers match your contributions only if you work overtime.

• Employers match a portion of your contribution up to a certain limit.

• Employers match every dollar you spend.

What is the benefit of employer matching in a 401k?

• It provides free money from your employer.

• It exempts you from paying taxes on the matched amount.

• It allows you to double your savings instantly.

• It guarantees a higher return on investment.

What happens if you withdraw from your 401k before age 59 and a half?

• You receive a bonus for early withdrawal.

• You pay a penalty of about 10% of the amount withdrawn.

• You are exempt from taxes on the withdrawn amount.

• You can only withdraw a limited amount.

Why might it still be beneficial to withdraw early from a 401k despite penalties?

• Because the penalties are waived for everyone.

• Because you can reinvest the money elsewhere.

• Because the employer match might offset the penalty.

• Because you can avoid future taxes.

What is a key consideration before withdrawing early from a 401k?

• The potential penalty and tax implications.

• The amount of free money you will receive.

• The interest rate on the account.

• The number of years until retirement.

What is the penalty percentage for early withdrawal from a 401k?

• 5%

• 10%

• 15%

• 20%