| | 401k plans October 3, 2006 |
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401k plans: 401k plans are basically good retirement plans that prove to help you very much in reaching your financial goals. With a 401k plan, you can be rest assured that you will collect enough money for a comfortable retirement. Today, many working people find that social security
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checks are not sufficient on their own to maintain their standard of living on retirement. This is why they tend to prefer having a 401k plan.
It is usually the employer who offers their employees 401k plans. These 401k plans can be used wisely with the fullest advantage wherein you will have an additional source of income in your retirement time. Different employers set different 401k plans; and the best way of reaping maximum profits from the 401k plan is to be well versed with the terms and conditions of the plan, and make educated choices accordingly.
The main thing that you have to find out from your 401k plan is the maximum percentage of your salary that you will be able to contribute towards the 401k plan. Once you know the maximum percentage of the salary that can be contributed, you can discuss this point with the employer, and decide on the amount that you would like to be deposited to the 401k plan. You don’t have to make payments for the 401k plan; the amount is automatically deducted from your paycheck every month. So there are no hassles or tensions that you have of making payments on time for the plan.
The funds that accumulate in the 401k plan can be used for investment in any stocks and mutual funds you wish. This money is not taxed on any capital gains or interest till the time of withdrawal of the money. It is at the age of 60 that you are permitted to withdraw money from the 401k plan. However, when withdrawing the funds, you have to pay some income tax on the funds. It is possible to withdraw the money before attaining the age of 60. However, in such cases, there is a penalty of payment of taxes that has to be borne by you. It is not that all employers can offer 401k plan to their employees. The private and tax-exempt employers can provide 401k plans to their employees. It is the state governments that cannot offer the plans to their employees. There are many employers who also offer matching amount of payment towards your 401k plan. This means that the employer pays an equivalent amount of money towards your 401k plan every month, when you make payments. And in the long run, the longer you work with the employer, the higher is the possibility of the employer raising this amount. As an employee, you find that the 401k plan is very advantageous to you. This is because the contribution that you make to the 401k plan is money from your pay check that is pre-tax. With this, you end up paying less money as tax on your salary check and this is beneficial to you. Even the contributions that the employer makes to your 401k plan is exempted from tax. And since you have the liberty of choosing the future contributions for the money in your 401k plan, it proves to be a very flexible plan for you.
The 401k plan proves to be beneficial to not only you, as the employee, but also to the employer. The contribution the employer makes to your 401k plan need not only be matching your contribution. They can also make independent contributions that can be tied with a firm’s profits to be part of a profit sharing plan of the company. This in turn reduces the amount of tax on the part of the employer.
Another point that has to be kept in mind before applying for a 401k plan is to find out if there is a specific number of years that you have to work with the company before being eligible for contributions from the employer for the 401k plan. Find out if the earnings that are contributed to your account are posted in a weekly, monthly or quarterly basis. This way you can find out when you have to expect to receive account statements about the 401k plan. A point to be noted is that it proves to be more beneficial for you if earnings are added to your 401k plan more often than seldom.
When applying for your 401k plan, find out how you can actually access the account, if needed. Some 401k plans can be accessed through the internet and others by phone. There are still more 401k plans that can be accessed only through writing too. So for easy access to the plans, it is usually better to choose 401k plans offering access through phone or internet instead of through writing.
Another point about 401k plans that have to be borne in mind is that these plans are not provided insurance by the federal government. This way, its investments are also at risk; however, different investments have different degrees of risk. This is why it proves to be better to diversify all the investments in the 401k plan in different types of assets like mutual funds and stocks. This way if one asset is at a risk, the other asset will be safe. In case you change jobs, you have numerous options on what is to be done with the 401k plan. You can of course, have your 401k plan carried over to the new employer. This is the easiest and best option wherein your 401k plan retains continuity with the new employer paying installments towards your 401k plan. The other option you have is to encash the money that has accumulated in the 401k plan. However, with this option, you have to pay some fees and taxes for early withdrawal of the money in the plan.
Another option that you have is that you can leave the job, and in the process have your 401k plan be maintained by the previous employer. There are many employers who will maintain your 401k plan for you, but will of course not pay any installment towards the plan. However, with this option, you have to pay some money towards the old employer’s firm for their services of maintaining your account for you. As it can be seen, on the overall, it is much more beneficial to you to have a 401k plan, in preparation for financial safety in your retirement.
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