Q:

How do you start a 401(k) retirement plan?

A:

Quick Answer

Typically, a 401(k) plan is started or offered through an employer, and the employee decides how much to contribute through payroll deduction, states CNN. A sole 401(k) plan is designed for self-employed people. It's available in traditional and Roth form and may be split into both types of account by the individual.

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How do you start a 401(k) retirement plan?
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Full Answer

While the company a person works for sponsors the 401(k) plan being offered, the company itself is not responsible for investing the money, according to CNN. Instead, the company hires an outside mutual fund company, brokerage firm, or life insurance company to take care of the planning and investment aspects. Payroll deductions are then sent to the company managing the 401(k) investments. Generally, the average 401(k) plan involves at least five mutual funds, invested in differing sectors.

A person who chooses the Roth option for a sole 401(k) plan contributes money after taxes are paid, explains CNN. This allows the money to grow tax-free, meaning it is not taxed upon withdrawal. People with solo 401(k) plans may borrow against the account if desired. The traditional option allows the individual to contribute money that has yet to be taxed. This means that upon withdrawal, the funds are taxed and can be taxed at whatever the current tax rate is, even if it is higher.

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