401k | Get more Free 401k Information from an Expert |
| Overview | Named for a section of the Internal Revenue Code, a 401(k) plan is a retirement plan that permits employees of a qualifying company to set aside a percentage of their pretax income into a tax-deferred savings vehicle. Generally, the individual determines the percentage of income which is contributed into this account. When the plan holder reaches the age of 59 1/2, funds can be withdrawn without penalty. The individual must start withdrawing 401(k) assets once he or she reaches the age of 70 1/2. |
| Benefits of Participating We and just about everyone else advise that you should always try to take full advantage of matching programs. | There are a number of benefits to participating in a 401(k) plan. The most notable is that it is shielded from taxes. Contributions are taken directly from the employee's paycheck before taxes are withdrawn and are not counted as net income on your tax return. Your contributions and all subsequent returns are not taxed until you withdraw the money much later, at which point you may well be in a lower tax bracket. Another very important benefit is contribution matching. A 401(k)-sponsoring company may elect to match all or part of the funds contributed by its employees. You should think of this as "free money"; companies offer it as both an employee benefit and as a strong incentive to contribute aggressively into a retirement account instead of having to offer a company pension plan. |
| Contributions Levels | Generally, an individual determines the percent of their contribution, and may put in up to 15% of their total annual income, with a maximum of $10,500. The limit on the annual contribution for both the employee and the employer is 25% of income or $30,000, whichever is less. This is a limit that applies directly to the individual, regardless of the number of employers he or she may have. |
| Changing Jobs or Moving Accounts | The money deposited into a 401(k) account is subject to some limitations, which for the most part are designed to keep the money invested until the account matures. One notable exception to this is that some employers have vestment limitations, and may require an employee to remain with the company for a certain duration before the funds contributed by the company are considered "vested" or earned. Assets from a 401(k) plan may be withdrawn before the age of 59 1/2, but this withdrawal is subject to a penalty of 10%, except if an employee is let go or "separated" after the age of 55. There are other exceptions to this rule, such as disability, death, extreme financial hardship, and excessive medical expenses. When an employee leaves a company, he or she may choose to roll a 401(k) plan into a new employer's plan or into an IRA account. This rollover must occur with 60 days of the date of termination or the money is subject to the 10% early withdrawal penalty. |
