Retirement planning is one of the most important aspects of a healthy financial life. Basically, retirement planning involves putting money away in a variety of savings instruments with the intention of using that money to finance your living expenses after you retire from the workforce. The 401(k) account is one of the most important of those savings instruments.

The 401(k) account was born in 1978 and was named after the section of the newly revised internal revenue code that addresses retirement accounts. Prior to the 401(k), the only retirement savings vehicle available to most companies were pension plans, which were expensive to maintain and provided less incentive for companies to provide the plans. For the most part, 401(k)’s have replaced pension systems nationwide.

A 401(k) account is the main element of most people’s retirement plans because it provides a tax incentive to save for retirement. All money invested in a 401(k) is contributed in pre-tax dollars, lowering the overall yearly tax liability of the employee. For example, if an employee makes $65,000 per year and contributes $10,000 to his/her 401(k) account, that employee would only pay tax on $55,000 because the money is contributed pre-tax. Because of this benefit, the IRS limits the amount an employee may contribute to their 401(k) account – $15,500 in 2007.

The 401(k) account is usually invested in various forms of investment vehicles such as stocks, bonds, mutual funds, and money market funds. Mutual funds are the most popular investment vehicles for a 401(k) account. The employee is usually presented with an array of choices for funds and other investment vehicles which differ in risk and potential gains. It is generally a wise move to seek assistance through a financial advisor in choosing the right funds to invest in unless you are familiar (and confident) with investing already.

Most 401(k) plans also come with the additional benefit of employer matching funds, which can add significantly to the value of your retirement account. These matching funds take several different forms, including an annual profit share or a percentage match for each employee-contributed dollar. Check with your Human Resources department to find out the particulars of your 401(k) plan. If your company does offer a matching plan along with the 401(k), then take advantage of it, as it amounts to free money you would be turning down otherwise.

This article only scratches the surface of 401(k) accounts and is intended to plant the seed for beginning a sound retirement plan. Further research is definitely warranted should you decide to invest in a 401(k) plan. It is always a wise decision to seek the assistance of professional financial advisors when making any significant financial move.