The government designed the 401 (k) retirement plan to encourage people to plan and save for retirement. As a reward, employees here get some tax benefits. It is sponsored by the company, where employers and the company make matching contributions. There are many rules and conditions for withdrawals called distributions to ensure that employees have a sizeable amount in their 401(k) at retirement and can earn a profit by investing the amount.

Types of 401 (k) plans
The two types of 401(k) plans are traditional, and Roth plans:

Traditional plans
The contribution for these plans comes from the pre-taxed income of the employer. For an employee, the withdrawals, contributions, and earnings attract the same tax rate as your income tax. Therefore, you are subject to a 10% tax penalty if you make any withdrawal before you reach the age of 59 ½.

Roth 401(k)
The contributions for Roth 401 (k) come from the taxable income of an employer. Your contributions and earnings are not taxed, provided you only withdraw if the account is held for five years or if the withdrawal is made due to the death or disability of the employee.

Earnings of 401 (k) plan
A company with 401 (k) plans offers multiple investment options to its employees. Employees can invest in mutual funds, index funds, large-cap and small-cap funds, foreign funds, and bond or real-estate funds. Financial advisory companies typically manage the 401 (k) contributions and invest them for you as per your choice. If you do not withdraw any amount from your 401 (k), there is no need to pay taxes on any earnings like interest, dividends, or investment gains. If you are young and have opened a 401 (k), you can earn compound interest on the profits if you reinvest the profits.

Contribution limits
For 2022, the annual contribution limit has been set at $20,500 if you are under 50, while the limit for employee-employer contributions has been set at $61,000. If you are above 50, you can make a catch-up contribution of $6,500.

Ways to use 401 (k) after retirement:

Withdraw cash
If you are over 59 ½ years old and decide to withdraw cash from the 401 (k) plan, there is no tax or penalty, but the money will be taxable in the year you withdraw it. If it is a Roth plan, you can withdraw only your contributions, provided you have had the account for a minimum of five years. But most experts agree that withdrawing cash is generally a bad idea unless there is an emergency.

Move the amount into an individual retirement account
After retirement, you can move the 401 (k) to an Individual Retirement Account (IRA) into a bank, a mutual fund account, or a brokerage within 60 days to avoid penalties and taxes. There are many strict rules for rollovers; if you do not follow them, you can end up paying a lot of penalties.

Let the 401 (k) remain with the employer
After retirement, you can maintain the 401 (k) with your employer, though they will not make any contributions. For example, if your 401(k) is less than $1000, an employer can give it to you as a check. However, if you have less than $5,000, the employer may ask you to transfer the amount into an IRA within 60 days of retirement.

Employees who have seen good profits through investments prefer this to avoid disturbing it. You should also note that if your stock has grown significantly, you may lose the tax breaks you earned so far if you move the 401 (k) to an IRA account. The only concern about leaving a 401 (k) with an employer is that many tend to forget it over time. Therefore, it is essential to keep track of it or inform family members who can track it and not forget about it in the future.