401k Retirement

401k retirement plans are one of the easiest savings and investment plans available. The employer generally sponsors these plans, which allow employees to contribute pre-tax monies from their salaries into the program. The employees can then invest the funds in a way that makes sense for their needs. If you have an employer who is offering a 401k retirement program, you should take advantage of it.

Traditional 401k

There are limits to the amount an employee can contribute into a traditional 401k program based on their age and the year the contributions were made in. Employers also have the option of contributing matching funds into an employee's portfolio. These are generally at a percentage of the contributions to these financial planning tools up to a certain amount of the employee's salary.

For instance, if an employer is matching at 50% up to 6% of gross wages, it means that if the employee contributes 6% of their salary into the fund, the employer will match 50% of their contribution. On the other hand, if the employee were to contribute 10% of their salary, the employer would still only contribute 50% of 6%.

If an employer offers a matching contribution to an employee's 401k retirement portfolio, it is wise for the employee to try to contribute at least up to the percentage of the match. It doubles the employees 401k contributions allowing them increase their savings by 50% if invested wisely.

Taxes for a 401k retirement savings are deferred, meaning that they are not paid until disbursement. While this seems like an excellent idea, you may be in a higher tax bracket when you retire than you are now meaning that you will pay more taxes on the same funds later than you would today.

Most 401k retirement plans give you the option of investing in a wide range of mutual funds. A mutual fund is a kind of collective investment scheme in which monies from the investors is pooled together and spread across a wide range of investments that may otherwise not be financial feasible to the individuals contributing. Mutual funds are usually a collection of stocks, bonds, money markets and other securities that fall within specific guidelines.

Roth 401k

In 2006, a new type of 401k retirement plan came into effect called the Roth 401k program. This program combined the traditional Roth plan with the 401k retirement plan to create a retirement plan that employees could contribute after tax funds into. In this plan, earnings may be tax-free as long as they are not withdrawn within the first five years of the plan, and the age of the contributor is at least 59 and one half. This plan is excellent for younger employees who would expect to be in a higher tax bracket when they retire.

401k Distributions

401k retirement plans are created to allow employees to save for retirement. Because of this, there are severe penalties assessed when the monies are withdrawn prior to retiring. In addition, if you cash out the monies in the fund, you will have to pay the taxes on the funds. There are other available options for employees to use if they are leaving a company prior to retirement. Monies in the account can be rolled over into another retirement account such as an IRA. This allows you to leave the funds in a tax-deferred status and not incur the penalties of early withdrawal.

Some employers allow employees to take out loans against their plan, which then need to be paid back with after tax funds. There are also hardship events that can eliminate the penalties such as, buying a primary residence, permanent disability, separation of service before reaching the age of 55, or death. Talk to an investment advisor before removing the funds from the account to ensure you are not subjecting yourself to unnecessary penalties and taxes.

Upon the age of 70 and 1/2, there are required minimum distributions in a retirement plan. Required minimum distributions are defined as the amount a retiree must withdraw each year. The amount of the distribution depends on the age of the retiree and their life expectancy in the IRS tables. If the employee is still working at that age, they may not be required to withdraw the funds. If the required minimum distributions are not met, there are extremely severe tax penalties that can be up to 50% of the amount that should have been withdrawn. Talk to a tax advisor to determine the appropriate required minimum distributions for your fund.

A 401 retirement plan is an excellent way to save for your future years. If you work for an employer who will match the contributions, try to contribute at least as much as they will match. No matter what your age, contributing to a 401k retirement plan is an excellent idea.

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