A 401(k) plan is one of a variety of employer-sponsored retirement plans. The funds transferred directly from wages into the 401(k) are generally tax deferred, meaning that taxes are paid when money is withdrawn, not when it is put in. This is generally to the advantage of the employee, as most retirees have lower tax rates than when they were working as a result of substantially lower overall income.
Many employers will match funds deposited by their employees into the 401(k) plan - this is a great benefit that will give an immediate return of 100% at least up to the amount the employer matches. Most employers set a limit as to how much of the deposit they will match. However, matching funds is one of the best features of many 401(k) plans.
Management
There are a couple of ways that the funds in a 401(k) plans are usually managed. The first, and most popular, is the employee directed. Here the employee is given a list of potential investments and is allowed to allocate and transfer the funds between the investment options available. The second is where there is a manager or trustee of the plan who makes all the investment decisions.
Getting the Money Out
One of the big problems with 401(k) plans is the restriction on what can be done with the funds before the employee retires. Usually there are very stringent requirements that must be met before an employee would be allowed to withdraw the funds early. And, the federal government imposes a 10% tax penalty on top of the normal income tax that would be due if the employee takes the money early.
Some plans allow employees to take a loan from the 401(k) to temporarily withdraw funds as a result of an unexpected hardship. Taxes are still deferred on the money received, as the loan is not taxed, but a pre-defined interest rate is charged, which becomes part of the 401(k) balance. It is important that employees only contribute as much to the 401(k) as they can afford to spare, as either of these options ends up costing in the long run.
Transferring a 401(k) Plan
A 401(k) generally remains active, even if the employee leaves the company providing the account. When leaving their old employer, the participant can transfer their funds directly into an IRA (another form of retirement plan), or they can transfer the funds directly into their new employer's 401(k) plan, if their new employer offers one.
Many employers will match funds deposited by their employees into the 401(k) plan - this is a great benefit that will give an immediate return of 100% at least up to the amount the employer matches. Most employers set a limit as to how much of the deposit they will match. However, matching funds is one of the best features of many 401(k) plans.
Management
There are a couple of ways that the funds in a 401(k) plans are usually managed. The first, and most popular, is the employee directed. Here the employee is given a list of potential investments and is allowed to allocate and transfer the funds between the investment options available. The second is where there is a manager or trustee of the plan who makes all the investment decisions.
Getting the Money Out
One of the big problems with 401(k) plans is the restriction on what can be done with the funds before the employee retires. Usually there are very stringent requirements that must be met before an employee would be allowed to withdraw the funds early. And, the federal government imposes a 10% tax penalty on top of the normal income tax that would be due if the employee takes the money early.
Some plans allow employees to take a loan from the 401(k) to temporarily withdraw funds as a result of an unexpected hardship. Taxes are still deferred on the money received, as the loan is not taxed, but a pre-defined interest rate is charged, which becomes part of the 401(k) balance. It is important that employees only contribute as much to the 401(k) as they can afford to spare, as either of these options ends up costing in the long run.
Transferring a 401(k) Plan
A 401(k) generally remains active, even if the employee leaves the company providing the account. When leaving their old employer, the participant can transfer their funds directly into an IRA (another form of retirement plan), or they can transfer the funds directly into their new employer's 401(k) plan, if their new employer offers one.
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