401K Retirement Plans

Established by Employers

401K s are qualified plans established by employers. Eligible employees make contributions on a post or pre-tax basis. Earnings accrue on a tax deferred basis. In many cases, employers match these contributions. Some 401K Retirement Plans add a profit-sharing feature. Limits or caps establish the percentage of allowed salary deferral contributions. Other restrictions include how and when employees can withdraw assets.

Advantages to 401K Retirement Plans

401K Savings and Early Withdrawal

For long term investments 401K Retirement Plans are great. However, it’s important to know that it is difficult to access 401K savings before age 59.5. If you have debt you want to pay off, your 401K savings may not be assessable to help. Contributions are made under conditions where taxes are deferred until distribution at retirement. Any withdrawal prior to retirement therefore incurs penalties, unless it qualifies as a hardship under the laws that establish 401Ks. An option to discuss with your 401K administrator would be the possibility of a 401K loan rather than withdrawing money.

Also, depending on how long you’ve been contributing, it’s important to note that employer contributions are not usually vested until after a number of years. This means that matching contributions do not become the property of the employee until they are vested. The best case scenario is to put money into a 401K Retirement Plan for retirement and leave it to grow. Then when you reach retirement age and plan where to retire and what you want to do with the rest of your life, the money will be there to help reach your goals.

Roth 401K

A Roth 401K retirement account is appropriate for people who determine they will find themselves in a higher tax bracket when they retire. If you are unsure, you may want to check with a 401K professional or use an online calculator to estimate whether it is better to contribute Roth deferrals or regular deferrals. The distinction between the two is that traditional deferrals are tax deferred. They provide a tax break now, but you pay taxes later. Roth deferrals offer tax-free distributions with certain requirements. It’s a perfect plan for long-term investors with the potential to accumulate considerable compounded earnings.

Limits on 401K Contributions

Before you get too excited about all the money you plan to tuck away in a 401K Retirement Plan, it’s important to know that limits on the amount of the elective deferrals you can contribute to your 401K plan are set by the IRS. For 2006 the limit was $15,000 and in 2007 limits increase to $15,500.

Why Choose a 401K Retirement Plan

401K Retirement Plans are one of the best ways to save for your retirement. If you have the opportunity to participate in a 401K plan through your job, start contributing to your retirement as soon as possible. Yes, it takes a bite out of your bring-home pay, but remember that when you defer compensation into an employer sponsored 401K program you pay less to Uncle Sam because the money comes out of your check before you pay taxes. Retirement living takes planning and now is the time to start if you want to enjoy an independent lifestyle later in life.

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