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all kinds of tips, tricks and frequently asked questions you can read over and review. We hope you find this page to be helpful and informative for you! Choosing the right retirement program can be a bit overwhelming if you don't know what to look for, so we've set this page up with as much 401
k information as we could get for you and made sure it's fast, easy and helpful to you. Here you go...
What's a 401k plan? Here's
A Quick Overview...
Employer-sponsored retirement plans are normally grouped into 2 major categories:
Defined Benefit (DB) and Defined Contribution (DC).
In a DB plan, the employer promises to pay a defined amount to retirees
who meet certain eligibility
criteria. In other words, the plan defines the benefit to be received. In its most typical
form, a DB plan pays a lifetime
monthly benefit to retirees who reach specific age and service requirements. Benefits
are usually linked to the amount of
service and based on final average salary. Employees can reasonably rely on a known and
expected benefit level; although
protection against post-separation inflation is usually limited and/or uncertain. The plan
sponsor may also provide an
alternative lump-sum "cash-out" of the benefit entitlement. Until relatively
recent times, the DB was the dominant form of
employer-sponsored retirement program.
In DC plans, the plan defines the contributions that an employer can make, not the benefit
that will be received at
retirement. The terminating employee receives the proceeds in a current or deferred lump
sum or annuity. Since the benefit
is not defined, the retirement outcomes are not known in advance.
Netbenefitswww 401K Com Tips:
Unlike IRA or other retirement-saving accounts, 401(k) plans allow limited, penalty-free access to savings before age 59 1/2. One option is taking a loan from yourself! It is legal to take a loan from your 401(k) before age 59 1/2. The tax code does not specify exactly what loans are permitted, just that loans must be made reasonably available to all participants. The employer can restrict loans for purposes such as covering unreimbursed medical expenses, buying a house, or paying for education. When a loan is obtained, you must pay the loan back with regular payments (these can be set up as payroll deductions) but you are, in effect, paying yourself back both the principal and the interest, not a bank. If you take a withdrawal from your 401(k) as money other than a loan, not only must you pay tax on any pre-tax contributions and on the growth, you must also pay an additional 10% penalty to the government. There are other special conditions that permit withdrawals at various ages without penalty; consult an expert for more details.
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Important 401(k) Rules:
401k Rules Regarding Contribution:
* In 2005, the cap for individual contribution was $14,000.This number increased to $15,000
in 2006, and after 2006, the cap adjusts annually in $500 increments.
* The maximum total amount contributed to your 401k plan isthe lesser of 100% compensation
or $42,000.
* If you’ll be age 50 or older by the end of theyear, you may make an additional
“catch-up”contribution each year. The maximum “catch-up”contribution
is $4,000 in 2005 and $5,000 in 2006.
* For highly compensated employees (those with income inexcess of $95,000 in 2005), they
may not be allowed to contribute atthe maximum rate in the company.
* You can only contribute money to your 401k plan byautomatic payroll deduction.
* You may not get your employer’s match if you leave your employer in less than three
years. However, more and more companies have began offering immediate vesting to their
employees
401k Rules Regarding Withdrawals:
* Since you contribute money to your 401k plan tax free, youmust pay income taxes on all
withdrawals, unless you rollover the moneyto another employer-sponsored plan or to an IRA.
* You have to wait until age 59 ½ to tap youraccount without a 10% early withdrawal
penalty. However, if you leave your company when you’re age 55 or older, or if you
become disabled, you don’t have to pay the 10% penalty.
* Many 401k plans only allow early withdrawal if it is for financial hardship purposes. An
employer can determine its own definition of “hardship”, but many use“safe
harbor rules” which allow withdrawals for the following reasons: 1) To pay medical
expenses, 2) To cover down payment or to avoid eviction or foreclosure on primary
residence, 3) To paycollege tuition, and 4) To cover funeral expenses for a family member.
* You must begin taking minimum required distribution (MRD)from your 401k plan by April 1
following the year your reach age 70½ or the year in which you retire, whichever is
later. You can take more than MRD in a given year. However, you can’t rollover MRD to
another tax-deferred account.
Reasons why 401ks are a smart idea:
A company match can help your investments grow
Some companies offer a match as an incentive to join the company retirement plan. It means that the company will contribute a certain amount to your account for every dollar that you contribute, up to a certain limit. The match formula can vary.
To receive the matching contribution, the plan may require that you work a specified number of years. It makes good sense to take advantage of a company match by setting aside the maximum amount required to qualify for a matching contribution. If your employer offers a matching contribution, your retirement savings have the potential to grow that much faster. In order to maximize an employer match, you might want to consider spreading your contributions throughout the year so you receive a match every month (subject to IRS limits).
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