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					A 401(k) plan is a retirement plan set up by your employer to which you can contribute pre-tax income.
It’s typically set up with an investment company, an insurance company, or a bank trust department.
Most 401(k) plans let you choose from a variety of investment vehicles, from individual stocks or mutual
funds to money market accounts.

401(k) plans offer several advantages. First, your taxable income is reduced by the amount you
contribute. Second, you don’t pay income tax on the earnings in the account, such as interest and
dividends, until you start making withdrawals - presumably at retirement. Plus, many companies match
some or all of your contributions. Not participating in a 401(k) plan in that case is like saying "no, thanks"
to money from your employer.

Possibly the best feature of a 401(k) plan is that once it’s set up, it’s automatic. The contributions are
taken from your paycheck come rain or shine, without you even thinking about it. Over many years, you
may acquire a bigger nest egg than you dreamed possible.

There are a number of downsides to a 401(k) plan. The most important may be this: Your employer may
rely too heavily on a consultant to organize the plan. That may result in investment choices that aren’t
very good or are just plain too expensive. The other downside is, there is a limit to how much you can
contribute, called a cap or max. Once you reach that max you may continue to save for your retirement
in a personal IRA-see below

What is an IRA?

An Individual Retirement Arrangement, or IRA, is a type of retirement account that almost anyone can
open. This plan is set up on your own, most people who own their own small businesses (independent
contractors) usually contribute to an IRA. Unlike pensions and 401(k) plans, IRAs are not run by your
employer. Just ask a bank, brokerage, or other financial institution for an application and make a
contribution. Your IRA account will grow tax free until you withdraw the money -- generally after you
retire.



Both IRA’s and 401k will be taxed when you withdraw after your retire. If you take any money from
your retirement accounts (401k or IRA) you will be penalized and pay high taxes on your early
withdrawal.

You may use your retirement as collateral for a loan, this usually called “borrowing against your
retirement”. The bank gives you aloan, if you should default on that loan, then the bank can take from
your retirement funds. You are still responsible for the taxes and a default puts a tremendous
negative mark on your credit report.

				
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