401(k) Plan FAQs What is a 401(k)? A 401(k) plan is a retirement savings account that is sponsored by an employer. Employees can choose to have a portion of their paycheck automatically deposited into the account. The money in the account can then be invested in a variety of different assets, such as stocks, bonds, and mutual funds. Employers may also offer a matching contribution, which can provide a significant boost to the account balance. What are the benefits of a 401(k) plan? There are several benefits of a 401(k) plan. First, the money in the account grows tax-deferred, meaning that you will not have to pay taxes on any of the gains until you withdraw the money in retirement. Second, 401(k) plans often offer a matching contribution from the employer, which can further accelerate the growth of the account balance. Finally, 401(k) plans offer a wide variety of investment options, allowing employees to tailor their portfolio to their individual needs and risk tolerance. What are the penalties for early withdrawal from a 401(k) plan? There are several penalties for early withdrawal from a 401(k) plan. First, you will generally have to pay taxes on the money that you withdraw. Second, you may also be subject to a 10% early withdrawal penalty. Finally, if you withdraw money before you reach age 59 1/2, you may be required to pay an additional 10% penalty. What is a 401(k) rollover? A rollover is a process whereby you move money from one retirement account to another. Rollovers can be either direct or indirect. A direct rollover occurs when the money is transferred directly from one account to the other. An indirect rollover occurs when you receive a check from one account and then deposit the money into the other account. What are the tax consequences of a rollover? The tax consequences of a rollover will depend on the type of rollover that is performed. A direct rollover is typically tax-free, while an indirect rollover may be subject to taxes and penalties. About the Author True Tamplin, BSc, CEPF® Facebook Linkedin Instagram Twitter Youtube True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists. True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics. To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.