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:
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.
- What is 401(k) Plan?
- How does the plan work?
- How do you benefit from the plan?
- What are its drawbacks?
- Can you take a loan from your 401(k) account?
- How can you improve your declining 401(k) balance?
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:-
- Participant has to be in pay status.
- They are not in the 6 months non-contribution period following the receipt of financial hardship in-service withdrawal.
- 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:-
- 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.
- 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.
- If your employer's contribution matches yours, the matched amount is your extra gain.
- 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.
- 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.
- 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:-
- 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.
- 401(k) plan is not insured by the Pension Benefit Guaranty Corporation.
- 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.
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:-
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.
- 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.
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.
Welcome george_gs,
The IRS has a rule known as 72(t) according to which a person contributing to 401k plan account can withdraw cash prior to the age of 59 and 1/2 years without having to pay the 10% penalty.
The IRS has a rule known as 72(t) according to which a person contributing to 401k plan account can withdraw cash prior to the age of 59 and 1/2 years without having to pay the 10% penalty.
Hi George,
Welcome to the forum.
72(t) distribution is a rule of IRS that eliminates 10% penalty even if you withdraw money early from your 401k, 403(b) plan prior to age 59/12.
Hope this helps you.
Feel free to ask if you have any further questions.
Best of luck,
Larry
Welcome to the forum.
72(t) distribution is a rule of IRS that eliminates 10% penalty even if you withdraw money early from your 401k, 403(b) plan prior to age 59/12.
Hope this helps you.
Feel free to ask if you have any further questions.
Best of luck,
Larry
Hi,
Welcome to Mortgagefit discussion board.
72(t) distribution from an IRA rollover account is one of the ways through which you can save yourself from the penalties if you wish to take early retirement and also want to get benefits from your 401(k) plan account.
Say you want quit your work early. Then you need to roll your 401(k) into IRA. After that you can apply for 72(t) distribution. The rule is after the completion of the rollover and setting up the 72(t) you must continue it until the age of 591/2 or minimum of 5 years whichever comes last.
Do let me know if you have any other questions.
Thanks
Blue
Welcome to Mortgagefit discussion board.
72(t) distribution from an IRA rollover account is one of the ways through which you can save yourself from the penalties if you wish to take early retirement and also want to get benefits from your 401(k) plan account.
Say you want quit your work early. Then you need to roll your 401(k) into IRA. After that you can apply for 72(t) distribution. The rule is after the completion of the rollover and setting up the 72(t) you must continue it until the age of 591/2 or minimum of 5 years whichever comes last.
Do let me know if you have any other questions.
Thanks
Blue
hello larry, is it 72(t) or 73(t)? pls clarify.
Hi Dan,
I am talking about 72(t) distribution plan not about 73 (t) :)
I am talking about 72(t) distribution plan not about 73 (t) :)
Is The money I contribute to my 401k secure. In other words my contributions are basically in a saving account (I've opted not to invest it so I get minimum return). Are there anyway possible reasons that money wont be there when I retire?
As far as I know, the 401k money is usually secure.
i am 65 if i am working in a new company can i contribute to a new 401k, and what happens after 70 can i still contribute - and at 70 how much do i have to withdraw from my old 401k
Hi Joyce!
Welcome to Forums!
If your new company offers you a 401k plan, then you can contribute to that plan. You must begin making distributions from your old account after you turn 72. If you are still employed at the company sponsoring the 401(k) plan, then you do not need distributions. The amount of distributions will depend upon life expectancy according to the relevant factors of the correct IRS tables.
Feel free to ask if you have further queries.
Sussane
Welcome to Forums!
If your new company offers you a 401k plan, then you can contribute to that plan. You must begin making distributions from your old account after you turn 72. If you are still employed at the company sponsoring the 401(k) plan, then you do not need distributions. The amount of distributions will depend upon life expectancy according to the relevant factors of the correct IRS tables.
Feel free to ask if you have further queries.
Sussane
I am 59 1/2 and would like to withdraw from my 401k to become debt free...
Hi jaguar,
As far as I know, the rules for withdrawing money from your 401k account states that you will have to be 59 1/2 years old to withdraw money from this account without penalty. As you have mentioned that you are 59 1/2 years old, I think you will be able to withdraw the money.
Thanks,
Jerry
As far as I know, the rules for withdrawing money from your 401k account states that you will have to be 59 1/2 years old to withdraw money from this account without penalty. As you have mentioned that you are 59 1/2 years old, I think you will be able to withdraw the money.
Thanks,
Jerry
I am 59 1/2 and would like to make a large withdrawal from my 401k to payoff my high credit card debt.
how financial wise will this be?
Hi jaguar
As you are 59 and 1/2 years of age, you will face no issues in withdrawing from 401(k). Withdrawing from 401k is not a bad idea. But as you want to pay off credit card debts, you can even try for a debt consolidation or a debt settlement. In case of a debt settlement, your outstanding balance will be reduced by 40%-60%. In case of debt consolidation, the interest rates may be reduced. I know of a debt consolidation community - "debtconsolidationcare.com". You can visit their website and speak to their financial coach. Let's hope they will be able to help you.
Thanks.
As you are 59 and 1/2 years of age, you will face no issues in withdrawing from 401(k). Withdrawing from 401k is not a bad idea. But as you want to pay off credit card debts, you can even try for a debt consolidation or a debt settlement. In case of a debt settlement, your outstanding balance will be reduced by 40%-60%. In case of debt consolidation, the interest rates may be reduced. I know of a debt consolidation community - "debtconsolidationcare.com". You can visit their website and speak to their financial coach. Let's hope they will be able to help you.
Thanks.
what percent is considered miniumum after 70 1/2