401(k) Plans and You
A 401(k) is a retirement savings plan that is offered by companies to their employees. Workers can save a small percentage of money from their paychecks before taxes are deducted. A 401(k) is beneficial in helping people save for the future. If you want to maintain your standard of living after retirement, then you need to start saving money. A 401(k) is just one of the effective ways through which you can do that.
There are two types of 401(k); one is a defined benefit plan and the other is a defined contribution plan. A defined benefit plan, as the name suggests, is a plan in which all the benefits that you are offered are defined. The workplace or employer offers to pay a specified amount of money to people who retire, given that they meet certain criteria. This plan offers monthly benefits to retirees for the rest of their lives. The benefits usually depend on the services and salary of the individual. It is a good plan as employees know how much they will be getting beforehand.
A defined contribution plan on the other hand defines the contributions that the employee will make towards his retirement instead of the benefits. Since the benefits are not defined, an employee cannot know the outcome in advance.
Vested balance is the amount of money that you can take with you if you decide to leave the company before the defined age/duration of retirement. It also helps in determining how much you can borrow from your 401(k) if you decide to take a loan. All employees must be 100 percent vested by retirement. The employee is not the only person who can put money into their 401(k). The employer can also contribute on the employees’ behalf. This is called an employer match.
You can oversee your account through an administrator. They can manage your accounts, send you updates about your plan, do paperwork and help with your questions and requests. You can get the help of your administrator to restructure your investments or to watch over your account.
You can control how your money is invested in a 401(k). It may be recommendable to put as much money into your 401(k) as you can without affecting your current way of living. While it can help save for your retirement, it can also be very restrictive. For example, you can’t tap into your 401(k) before a certain period. It serves as insurance against workers leaving early.
Here are some quick 401(k) facts to consider:
- Any business can have a 401(k) plan, be it a proprietorship, partnership, corporation, self-employment, etc.
- The workplace can restrict employees from being eligible for the plan if they have worked for less than a year, if they’re part-time workers, non-US citizens, union members, etc.
- Participants of 50 years of age or older can make “catch-up” contributions of $6,500 per year starting in 2020.
- Any withdrawals before the age of 59 1/2 will have a 10% penalty tax applied to it.
- You can make a vesting schedule for the contributions made by the company with certain guidelines.
- The employer has no obligation to contribute towards an employee’s 401(k) unless the plan is considered top heavy.
- You can make all your savings and contributions online.
- You can invest the money that is saved in your 401(k).
- There is no federal income tax applied to the money you have saved up until a distribution is made.
- Contribution to your 401(k) can come from employee salary reduction, the employer, or both.
Most companies let you file for a 401(k) as soon as you join. You can increase or decrease your contributions at any time. You also need to select a beneficiary who will get the money when you die. If you are married, then your spouse is automatically appointed the beneficiary.
Another benefit of 401(k) is that even if your company is going under, your 401(k) will not be affected. If your company does go under, the plan is automatically terminated. You can move your money to a traditional IRA to avoid paying a 10% withdrawal fee.
401(k)s are popular among employees due to tax deferral, among other things.
