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401(k) Retirement Plan: The Smart Way to Secure your Future

Posted on: 22nd Jun, 2005 04:03 am
One of the smart ways to save and invest for your retirement is the employer-sponsored 401(k) Retirement Plan. This article explains the basics of the plan and highlights the following aspects:



What is 401(k) Plan?


This retirement plan helps you to authorize your employer to deduct a certain amount of money from your salary before taxes are calculated and put it in the retirement account. You may also utilize the cash in the account for investment purposes.

How does the plan work?


  • Maximum Contribution:
    When you participate in a 401(k) plan, you tell your employer how much you want to pay for your retirement account. You can usually put up to 15% of your salary into the account each month, but the employer has the right to limit that amount. The IRS limits your total annual contribution to $ 15,500 (for 2008).

  • Employer's Contribution:
    Your employer's contribution may match yours but at different levels. A typical match might be 25%-50% of your own contribution up to a certain level.

  • Investment Options:
    With the new rule coming into effect from the end of October 2007, employers can select from a list of pre-approved funds which they consider suitable for long-term investments. Actively managed funds, life-cycle and balanced funds will be accepted but money market and stable value funds will be excluded from the investment list.

  • Withdrawal Option:
    After reaching 59 and 1/2 years you may withdraw from your retirement account without paying the penalty. But after 70 and 1/2 years you must withdraw a required amount, that is the minimum distribution. Otherwise, you will have to pay an accumulation tax as much as 50% of your required distribution.

  • Added Contribution:
    A Catch-Up Contribution option has been added to this retirement plan. This option enables participants aged 50 and above to increase their contribution in the retirement account. It refers to a supplementary pre-tax contribution made by the participant in excess of the IRS limit or even an employer-imposed plan limit. The annual catch-up contribution limit is $5000 for 2008.

    Eligibility for catch-up contribution:-

    1. Participant has to be in pay status.

    2. They are not in the 6 months non-contribution period following the receipt of financial hardship in-service withdrawal.

    3. The participant's regular plan contributions must reach at least one of the following limits to qualify for catch-up contribution:
      • The Annual Deferral Limit ($15,500 for 2008).
      • The Plan's Deferral Limit (up to 15%).

How do you benefit from the plan?


The benefits that you share from the 401(k) plan are as follows:-
  1. The money you contribute comes out of your paycheck before taxes are calculated and this means that by contributing to a 401(k), you can actually lower the amount you pay each time in current income taxes.

  2. All employer contribution and any growth in the 401(k) account grow tax-free till you withdraw it. Once you start withdrawing the required minimum distribution, you have to pay tax on the withdrawal at your current income tax rate.

  3. If your employer's contribution matches yours, the matched amount is your extra gain.

  4. The employee can decide where to invest current savings and/or future contributions so that he can get can get maximum returns on his investment.

  5. Unlike a pension plan, all contributions can be moved from one company's plan to another company's plan or to an IRA if the participant changes his job.

  6. The plan is protected by Pension (ERISA) laws.

What are its drawbacks?


Putting down your money into a 401(k) account is indeed advantageous but there are some drawbacks as given below:-
  1. It is difficult to access your 401(k) savings before the age of 59 and 1/2 years but it is not impossible. In case of emergency you can withdraw from your account before you reach this age but 10% of your total distribution will be charged as penalty along with the taxes.

  2. 401(k) plan is not insured by the Pension Benefit Guaranty Corporation.

  3. Employer matching contributions do not become the property of the employee until a number of years have passed.

Can you take a loan from your 401(k) account?


It is easier to take a loan from this account as you don't have to undergo a credit check or a lengthy approval process. Even the rate of interest is comparatively low and you pay the interest to yourself.

However, there are demerits too. The money out of the account is not growing, there may be fees involved in the process and the loan must be paid back immediately if you change your job. Moreover any default in loan repayment is considered as an early withdrawal forcing you to pay taxes and penalties.

How can you improve your declining 401(k) balance?


Look closely at how you are investing. Then follow the simple steps given below:-
  • If you are investing heavily in your employer's company stock, reduce this amount and spread your investments.

  • Adjust your contributions and you can contribute the maximum tax-deferred amount to your 401(k) account.
Your age and your company's plan policy will help you to decide on the strategies you adopt to repair your plan account.

401(k) is an excellent way to plan for your retirement. It helps you to increase your savings and at the same time make money by investing in the plan options. Thus, you can have complete financial security at the time of your retirement with the help of 401(k) Plan.

Hi window

If you're over 70-1/2 years old, then you are required to do some mandatory withdrawals from your 401k account. As far as I know, the minimum distribution amount at 70 1/2 years of age is currently 3.65%.

Thanks.
Posted on: 13th Jan, 2009 01:47 am
What is the difference between per and post tax contribution to a 401? Is it like the difference between IRA and ROTH IRA?
Posted on: 19th Feb, 2009 05:59 pm
Post-tax contributions are not tax-deductible as a result of which you will not get a tax break for making them. As the post-tax contributions are made with money that you have already paid taxes on, you can enjoy the benefit of tax-deferred growth.

As you withdraw post-tax 401(k) funds, you will have to pay taxes on the profit that your investment has earned. You may also withdraw your post-tax contributions at any time without incurring a penalty depending upon the plan. The post-tax 401k can be rolled into a Roth IRA when you retire and you are not required to make mandatory withdrawals at the age of 70.

As far as the pre-tax contributions are concerned, the taxes are due only when you take money out of your account. It is known for the advantage of postponing tax bills during your high income years.
Posted on: 19th Feb, 2009 11:30 pm
can you with draw funds from a IRA nad still contribute to a 401-k
Posted on: 13th Mar, 2009 07:10 am
I think it is possible to withdarw dunds from IRA and then contribute to 401k. However, withdrawals from IRA before the age of 59 1/2 are subject to a 10% federal income tax penalty.
Posted on: 13th Mar, 2009 11:39 pm
I am 53 years old and have around 100K in my 401K plan. I have some credit card debt that I would like to eliminate. I receive a modest pension from my previous employer and am still working. I would like to know if it would be a wise move to take money out to pay off these debts?
Posted on: 11th Apr, 2009 10:05 am
Hi Serita,

If you want to pay off your credit card debt using your 401k plan, you will actually have to withdraw a lot more than what you owe on your credit cards. The reason is the amount of penalty that you'll be paying for the withdrawal. The penalty would be 10% of the amount of money withdrawn and another 15% (atleast) as ordinary income taxes on the money. The same amount, if kept untouched would earn you a lot more in future. Thus, withdrawing from 401k will not be a very wise thing to do.

Thanks,

Jerry
Posted on: 14th Apr, 2009 06:05 am
I have a 401k plan at the company I work at. Want to retire at 55. Can I pull an income from this 401k plan as long as i leave it in the companies plan and not rolling over to another plan.
Posted on: 23rd Jan, 2010 05:35 pm
Have funds in traditional IRA, am older than 59 1/2. What factors should I consider in trying to decide wether or not to a w/d additional funds (above the RMD), paying tax thereon (tax rate lower than when funds placed in the IRA), reinvesting in tax free investments which provide a flow of income? What is the value of converting current holdings to ROTH IRA?
Posted on: 10th Jun, 2010 06:20 am
H!

Welcome to forums!

To Garrett,

Withdrawing money from the 401k plan before the age of 59 and ½ years of age will make you liable for tax penalty. If you are comfortable paying the taxes, then you can go ahead with the withdrawal.

To Jim,

As you're older than 59 and ½ years of age, you will be able to withdraw money from your IRA account. You won't be liable for any taxes in that regard. As far as converting the account into ROTH IRA is concerned, you should contact a tax adviser in this regard. He'll let you know whether there would be any tax implications.

Feel free to ask if you've further queries.

Sussane
Posted on: 10th Jun, 2010 11:37 pm
OUR COMPANY WOULD LIKE TO SETUP A 401 K PLAN FOR OUR EMPLOYEES. WE ARE A SMALL COMPANY OF 11 EMPLOYEES.

[Email address deleted as per forum rules. Thanks.]
Posted on: 17th Jul, 2010 12:12 pm
I don't think anyone here will be able to help you in setting up a 401k plan for your employees. I would suggest you to contact an attorney and take his help in setting up a 401k plan for your employees.
Posted on: 19th Jul, 2010 03:10 am
Who do I turn too to get a loan? What telephonew # do I need to call? How Ca I get My owqn Money. Pl. Help. For contact info. call 239-673-8625 or239-645-9267
Posted on: 19th Oct, 2010 07:12 am
Hi John,

If you want to take out a 401k loan, then you'll have to speak to your human resources or benefits manager at work, or by logging into your 401(k) plan's website. Some plan providers allow you to request loans online.

Thanks
Posted on: 20th Oct, 2010 12:32 am
NEED TO KNOW THE TABLE ON CASHING OUT 401K AFTER 70 1/2
Posted on: 01st Jan, 2011 01:05 pm
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