by Christine Zibas

Created on: February 17, 2009

Americans are living longer lives with better health. That's the good news. More than that, however, it should serve as a reminder of the importance of planning for retirement. Most Americans will not be able to rely on Social Security alone to meet their financial needs in their retirement years. Having access to a 401(k) plan through an employer is a key asset to providing the needed resources for retirement.

The Basics
A 401(k) is a form of retirement savings, named after a section of the Federal tax code. Its an employer-established plan similar to an Individual Retirement Account (IRA). A 401(k) plan is generally funded by an employee's pre-tax salary contributions, frequently along with a matching contribution by the employer. The employee's contributions, along with any matching funds and growth in the fund over time, are tax deferred until the employee reaches age 59 . Once money is in the 401(k) account, it generally cannot be removed without penalty (except for special circumstances) before the employee reaches age 59 . In many instances, however, employers include provisions for loans to be taken from an employee's plan.

Benefits of Investing in a 401(k)
Among the benefits of investing in a 401(k) are the following:

* Under a 401(k) plan, an employee's contribution is tax deferred; that is, the money saved cannot be taxed until it is withdrawn, adding to the overall amount.

* Because the contribution is taken from an employee's gross income, the pre-tax amount that is contributed means that income is not subject to Federal (or most state) tax until the money is withdrawn, typically at retirement. Frequently, the retired employee is in a lower tax bracket, and as a result, will pay less tax on this income overall.

* Automatic payroll deductions make saving less apparent and likely less painful.

* Unlike pension plans, the employee has control of his or her money under a 401(k) plan, determining how it will be invested and the level of risk is controlled by the employee, not the employer.

* A 401(k) plan is portable. It can be left with an old employer, moved to a new employer, or rolled over to an IRA, even withdrawn (although at a steep tax penalty).

* Unlike most investing, a 401(k) needs no minimum to open the account, and can be built slowly over time.

* Many employers establish an accompanying 401(k) loan plan that allows employees to borrow from their 401(k) accounts (without tax or penalties in the form of a "loan to self"). This loan can be paid off

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