What A 401k Means To You: Saving, Not Slaving Towards Your Future

Are you contributing to your future by contributing to your 401(K) plan? Do you have any clue as to what a 401(K) plan is? If your answers to these questions are no, then you need to continue reading. A 401(K) is an employer sponsored retirement savings program or “contribution” program. The main reason most people do not contribute to their retirement plans are that they do not know that they are available to them, or they are not educated in the pros of having one.

Four Common Retirement Plans

• 403(b): Retirement plan for employees of tax-exempt and non-profit organizations
• 457: Plan for employees of state and local municipal governments
• Thrift Savings Plan: Plan designed for Federal civilian and uniformed services employees
• 401(k): Retirement plan for employees of public or for-profit companies

Pros

• Tax-deferment: You do not pay federal or state income taxes on your savings or their investment earnings until you withdraw the $$ at retirement
• A majority of people’s tax rate is lower at retirement than during employment, causing you to pay less in taxes on your savings
• SAVE MONEY TOWARD YOUR RETIREMENT!!

401(K)

With a typical 401(k) retirement savings account, money is deducted from your paycheck before taxes are taken out which lowers your taxable income (in return lowering the amount of taxes you pay). Some employers allow you to make contributions on an after-tax basis. Depending on your employer you may or may not have a waiting period before you can begin to contribute. The IRS sets a maximum amount you can contribute each year ($17,500 for 2014, same as 2013). Employees over the age of 50 can make catch-up contributions up to $5,500, above and beyond the maximum amount for traditional plans and $2.500 for SIMPLE 401(k) plans. Most plans allow employees to contribute a set percentage.  Although it is not required by law, many employers match a portion of the contributions employees make. While making contributions to your 401(k) plan you are always 100% vested, meaning you have complete ownership of your own contributions. Several employers have a vesting schedule outlining how much of the company matching contributions and their investments you own at that time. You must begin withdrawing money from your 401(k) plan by the age of 70 ½, unless you are still a full-time employee with the company that is sponsoring your 401(k).

Roth 401(K)

A Roth 401(K) plan combines the features of a regular 401(K) with a Roth IRA plan. With this plan employees can contribute money on an after-tax basis. While there is no tax break upfront, your account grows tax free and your withdrawals are not later taxed if 1). You have had the account for 5 years (at least) and are 59 ½ years of age or older or 2). You are disabled or die.

Self-Employed Plans

If you are self-employed there are also retirement plans set in place for you. The Simplified Employee Pension IRA or SEP-IRA plan is a retirement plan where money is tax-deductible and investment earnings grow tax free until you withdraw funds at retirement.  If you are the sole participant in the plan, you can deduct contributions of up to 25% of your income or $40,000 (whichever is less). If you have employees, they may contribute up to 100% of their income or $40,000 (whichever is less). You may also be eligible for a Keogh plan if your business is not incorporated. Keogh plans are similar, but more flexible than an SEP and have higher contribution limits.

Changing Employers?

It is always a good thing to know that if you leave or are terminated from your employer, you do have options!

1. Roll over your current balance into a new employer plan
2. Roll over account balance into an IRA(Individual Retirement Account)
3. If the employer allows, you may leave your balance(over $500) in its current plan
4. Withdraw balance in lump sum cash payout:

• HEAVY TAX CONSEQUENCES
• Pay Federal and sometimes State taxes
• Face 10% early withdrawal penalty fee
• Employer is required to withhold 20% of your distribution for Federal taxes

Key Points to Know:

• You may have to be over the age of 21 to participate, check with your Human Resources contact
• “Vested”- belongs to you and cannot be forfeited if you leave
• By law, the longest graded vesting schedule a 401(K) plan can have is 6 years, as of 2002.

When thinking about your future saving is always at the top of the list, but along with saving is HOW you save. Why not save money, while making money at the same time. With any retirement savings plan you can save your hard earned money, earn interest, and in many cases have your employer match your savings. Retirement can be a chaotic time for some people, so make it easy on yourself and SAVE, not slave towards your future.