One great way to save for retirement is to save money into your 401k plan. But what is a 401k? And how can it help someone save up for retirement?

A 401k actually helps an employee to save up money into a tax deferred investment plan. This lets the money grow without being slowed down by the tax man.

However there is also a 401k contribution limit that is forced upon all 401k plans. This means that there is a limit each year on how much someone can invest into their plan. In addition to that many employers will also have their own rules for how much can be invested into it.

If your employer has a 401k plan it can be a wise thing to save money in it. This becomes an even better plan if your employer decides to help you along by matching your contribution. In this case your employer will deposit more money into your account for every $1 that you invest into it.

The idea of the plan is to simply invest money until you reach the age 59 ½ and start to take the money out to pay for your retirement. The 401k withdrawal rules don’t look kindly to people who want to take out some money from their account early.

If an employee tries to take money out of their account before they turn 59 ½ then they will be forced to pay not only the taxes on the money, but also a 10% early withdrawal fee. That is why it is usually better to actually wait until you retire before you actually take money out.

Once they reach this age they are able to take money out without paying the 10% penalty, but they would still have to pay taxes. After all the investment was tax deferred not tax free.