The 401(k) retirement plan
Author: motivationnews
The 401(k) retirement plan
is funded by employee contribution and a matching
employer contribution. The major feature of the plan is
that the contributions are taken from pre-taxed salary.
The fund accumulates tax-free until it is withdrawn.
Most businesses and tax-exempt organizations can create
these retirement plans.
The 401(k) takes its name from the IRC (Internal Revenue
Code) of 1978. The operation of the 401(k) is
administered by the EBSA (Employee Benefits Security
Administration) of the Department of Labor.
The 401(k) plan has a lot of advantages. First and
foremost is that the employee can contribute pre-tax
money that reduces the tax paid in each paycheck. Also,
the company contribution and any growth in the fund is
free of tax until withdrawn.
The compounding of the fund during a 20 to 30 year
period is quite amazing. The employee has a lot of
control in the direction of the future contributions.
When the company matches your contributions, it adds
something extra on top of your own money. All money in
the plan can be moved from one company to another unlike
pension.
The 401(k) plan is protected by pension laws since it is
a personal investment plan. It includes protection from
garnishment by creditors but not from domestic cases
that include child support.
There are some disadvantages in the 401(k) plan, it is
hard to get your 401(k) contributions before age 60 (59
1/2 to be exact). The 401(k) is not insured by the PBGC
(Pension Benefit Guaranty Corp). Also, the company
contributions do not kick in until a certain number of
years of service have been given. The rules state that
company matching contributions must either be a 3 year
'cliff' plan (100 percent after 3 years) or a 6-year
'graded' plan.
Employees participating in a 401(k) plan have many
options for investment. In most cases a listing of
mutual funds. The mutual funds usually include money
market fund, treasuries, stock funds and bond funds.
Some plans may include investing in company stock and US
Savings Bonds. The employee gets to choose how the
savings is invested. The employee can also choose at any
time to stop contributions.
Financial advisers usually say that the average 401(k)
contributor is non-aggressive in terms of their
investment options. Stocks have historically
outperformed other types of investment, since the 401(k)
is a long term investment it should be able to minimize
the stock fluctuations.
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