401(k) Plans



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With that settled, how much should you put in? At the very least, invest enough to get the full matching amount that your company pays to match your contributions. The rules for matching funds vary, so be sure to check with your employer about qualifying for its contributions. The IRS mandates contribution limits for k accounts.

They come in two varieties, the main differences being the tax implications and the schedule for accessing your funds. Chances are your company offers a traditional k. Less common is a Roth k. Most companies allow you to enroll in a k right away, although some smaller employers might make you wait up to a year. Some companies will automatically register you. You can normally increase or decrease your contributions at any time.

Your k is off-limits. If your company goes under, the plan would most likely be terminated. Email Printer Friendly Share: Buzz Fark reddit LinkedIn del. Tips At the very least, contribute enough to your k to get the company match. Target-date funds are a popular way to save for retirement. If your company goes under, your k is safe.

Comprehensive Retirement Calculator from SmartMoney. Find your asset allocation at SmartMoney. Income taxes on pre-tax contributions and investment earnings in the form of interest and dividends are tax deferred. The ability to defer income taxes to a period where one's tax rates may be lower is a potential benefit of the k plan. The ability to defer income taxes has no benefit when the participant is subject to the same tax rates in retirement as when the original contributions were made or interest and dividends earned.

Earnings from investments in a k account in the form of capital gains are not subject to capital gains taxes. This ability to avoid this second level of tax is a primary benefit of the k plan. Relative to investing outside of k plans, more income tax is paid but less taxes are paid overall with the k due to the ability to avoid taxes on capital gains.

For pre-tax contributions, the employee does not pay federal income tax on the amount of current income he or she defers to a k account, but does still pay the total 7. The employee ultimately pays taxes on the money as he or she withdraws the funds, generally during retirement. The character of any gains including tax-favored capital gains is transformed into "ordinary income" at the time the money is withdrawn.

Beginning in the tax year, employees have been allowed to designate contributions as a Roth k deferral. Similar to the provisions of a Roth IRA , these contributions are made on an after-tax basis. If the employee made after-tax contributions to the non-Roth k account, these amounts are commingled with the pre-tax funds and simply add to the non-Roth k basis.

When distributions are made the taxable portion of the distribution will be calculated as the ratio of the non-Roth contributions to the total k basis. The remainder of the distribution is tax-free and not included in gross income for the year.

For accumulated after-tax contributions and earnings in a designated Roth account Roth k , "qualified distributions" can be made tax-free. In the case of designated Roth contributions, the contributions being made on an after-tax basis means that the taxable income in the year of contribution is not decreased as it is with pre-tax contributions.

Roth contributions are irrevocable and cannot be converted to pre-tax contributions at a later date. In contrast to Roth individual retirement accounts IRAs , where Roth contributions may be re characterized as pre-tax contributions.

Administratively, Roth contributions must be made to a separate account, and records must be kept that distinguish the amount of contribution and the corresponding earnings that are to receive Roth treatment.

Unlike the Roth IRA, there is no upper income limit capping eligibility for Roth k contributions. Individuals who qualify for both can contribute the maximum statutory amounts into either or a combination of the two plans including both catch-up contributions if applicable. Aggregate statutory annual limits set by the IRS will apply. Generally, a k participant may begin to withdraw money from his or her plan after reaching the age of 59 without penalty.

The Internal Revenue Code imposes severe restrictions on withdrawals of tax-deferred or Roth contributions while a person remains in service with the company and is under the age of Any withdrawal that is permitted before the age of 59 is subject to an excise tax equal to ten percent of the amount distributed on top of the ordinary income tax that has to be paid , including withdrawals to pay expenses due to a hardship, except to the extent the distribution does not exceed the amount allowable as a deduction under Internal Revenue Code section to the employee for amounts paid during the taxable year for medical care determined without regard to whether the employee itemizes deductions for such taxable year.

The Internal Revenue Code generally defines a hardship as any of the following. Some employers may disallow one, several, or all of the previous hardship causes. To maintain the tax advantage for income deferred into a k , the law stipulates the restriction that unless an exception applies, money must be kept in the plan or an equivalent tax deferred plan until the employee reaches 59 years of age.

This does not apply to the similar plan. Many plans also allow employees to take loans from their k to be repaid with after-tax funds at predefined interest rates. The interest proceeds then become part of the k balance. This section requires, among other things, that the loan be for a term no longer than 5 years except for the purchase of a primary residence , that a "reasonable" rate of interest be charged, and that substantially equal payments with payments made at least every calendar quarter be made over the life of the loan.

Employers, of course, have the option to make their plan's loan provisions more restrictive. When an employee does not make payments in accordance with the plan or IRS regulations, the outstanding loan balance will be declared in "default". A defaulted loan, and possibly accrued interest on the loan balance, becomes a taxable distribution to the employee in the year of default with all the same tax penalties and implications of a withdrawal.

These loans have been described [ by whom? While this is precisely correct, the analysis is fundamentally flawed with regard to the loan principal amounts. From your perspective as the borrower, this is identical to a standard loan where you are not taxed when you get the loan, but you have to pay it back with taxed dollars. However, the interest portion of the loan repayments, which are essentially additional contributions to the k , are made with after-tax funds but they do not increase the after-tax basis in the k.

Account owners must begin making distributions from their accounts by April 1 of the calendar year after turning age 70 or April 1 of the calendar year after retiring, whichever is later. The amount of distributions is based on life expectancy according to the relevant factors from the appropriate IRS tables. Only a Roth IRA is not subject to minimum distribution rules. Other than the exception for continuing to work after age 70 differs from the rules for IRA minimum distributions. The same penalty applies to the failure to make the minimum distribution.

In response to the economic crisis, Congress suspended the RMD requirement for A k plan may have a provision in its plan documents to close the account of a former employee who have low account balances.

When a former employee's account is closed, the former employee can either rollover the funds to an Individual Retirement Account , rollover the funds to another k plan, or receive a cash distribution, less required income taxes and possibly a penalty for a cash withdrawal before the age of Rollovers between eligible retirement plans are accomplished in one of two ways: Rollovers after a distribution to the participant must generally be accomplished within 60 days of the distribution.

The same rules and restrictions apply to rollovers from plans to IRAs. A direct rollover from an eligible retirement plan to another eligible retirement plan is not taxable, regardless of the age of the participant. In the IRS began allowing conversions of existing Traditional k contributions to Roth k. In order to do so, an employee's company plan must offer both a Traditional and Roth option and explicitly permit such a conversion. There is a maximum limit on the total yearly employee pre-tax or Roth salary deferral into the plan.

In eligible plans, employees can elect to contribute on a pre-tax basis or as a Roth k contribution, or a combination of the two, but the total of those two contributions amounts must not exceed the contribution limit in a single calendar year.

This limit does not apply to post-tax non-Roth elections. This violation most commonly occurs when a person switches employers mid-year and the latest employer does not know to enforce the contribution limits on behalf of their employee. If this violation is noticed too late, the employee will not only be required to pay tax on the excess contribution amount the year was earned, the tax will effectively be doubled as the late corrective distribution is required to be reported again as income along with the earnings on such excess in the year the late correction is made.

Plans which are set up under section k can also have employer contributions that cannot exceed other regulatory limits. Employer matching contributions can be made on behalf of designated Roth contributions, but the employer match must be made on a pre-tax basis.

Some plans also have a profit-sharing provision where employers make additional contributions to the account and may or may not require matching contributions by the employee. These additional contributions may or may not require a matching employee contribution to earn them. There is also a maximum k contribution limit that applies to all employee and employer k contributions in a calendar year.

Governmental employers in the United States that is, federal, state, county, and city governments are currently barred from offering k retirement plans unless the retirement plan was established before May Governmental organizations may set up a section b retirement plan instead.

For a corporation, or LLC taxed as a corporation, contributions must be made by the end of a calendar year. For a sole proprietorship, partnership, or an LLC taxed as a sole proprietorship, the deadline for depositing contributions is generally the personal tax filing deadline April 15, or September 15 if an extension was filed. To help ensure that companies extend their k plans to low-paid employees, an IRS rule limits the maximum deferral by the company's highly compensated employees HCEs based on the average deferral by the company's non-highly compensated employees NHCEs.