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Portfolios 202: How Your 401(k) Plan Works

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1.
The 401(k) plan is a type of _______.
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Defined contribution plan. The amount of money that 401(k) plan participants receive in retirement is based on the amount that they (and their employers) contribute to the plan, in addition to the investment returns they earn on those contributions. "Defined benefit" plans, such as pensions, generally pay a guaranteed sum based on wages and years of service.
2.
What are the tax advantages of a 401(k) plan?
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Both of the above. You defer taxes on any investment gains and distributions AND save on taxes now, because you're investing in your plan with pre-tax dollars.
3.
How should you choose from among your 401(k) plan options?
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Choose options that will allow you to reach your financial goal. For some investors, that may mean stock funds only. For others, it may mean investing in bonds and cash options, too.
4.
How do you invest in a 401(k) plan?
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Your employer automatically deducts your contribution from your pay. Investing in a 401(k) plan is automatic; your employer deducts your contribution from your pay. And although your employer may match all or part of your contribution, you need to contribute some of your salary to your 401(k) to receive an employer match.
5.
Your 401(k) plan has a legal limit to how much you can contribute. However, some plans have a lower ceiling, which is based on _______.
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A percentage of your salary. This is typically a low percentage that can still add up nicely.