Retirement Planning is one of the most essential aspects of your lives.
The quality of your post retirement life depends on how well you have done your retirement planning.
If you want to live a happy and satisfied life after your retirement, you invariably have to undertake retirement planning.
Well, basically you have to save money and accumulate fund for your post retirement life. There can be different ways to do this and 401(k) Retirement Plan is perhaps the best way to accomplish retirement planning. Actually, 401(k) plan is one of the most popular retirement plans in America. 401(k) plan is in existence since 1978 and is better known as an employer sponsored retirement plan.
Today, millions of employees use 401(k) plan to save money for their retirement days. Moreover, many employers are using 401(k) plans for distributing company stocks to their employees. 401(k) plan is one of the most flexible retirement plans that you can use to save money for your post retirement years. In recent times, many variations of 401(k) plan have come into existence such as the safe-harbor 401(k) and the SIMPLE 401(k).
Here under, I elaborate to you the 401(k) plan so that you can too benefit from this retirement plan and get to have a potent means of preparing for your retirement days.
The 401(k) Retirement Plan?
If you go by definition, the 401(k) Plan is the tax-qualified, defined-contribution pension account in the USA which has been defined in the sub-section of 401(k) of Internal Revenue Taxation Code. The employee can choose to take compensation in cash or he can alternatively choose to defer a percentage of it to an account under this plan. Under the 401(k) plan, the retirement savings contribution is made by an employer. The contribution is deducted from the employee’s paycheck before taxation. So the amount is not taxable to the employee until it is distributed or withdrawn.
The 401(k) plan is a specific type of retirement plan, which is referred as a qualified plan. So the 401(k) plan is regulated by the Employee Retirement Income Security Act of 1974 and the tax code. Qualified plans are of two types that are defined-contribution plans or defined-benefit plans. 401(k) plan comes under the defined-contribution plan. This means that an employee’s balance is determined by contributions to plan and is also determined by the plan investments performance. Although, under the 401(k) plan it is not mandatory for the employer to make contributions, however, many employers do choose to make contributions in the employees fund under the 401(k) plan.
Contribution Limits under 401(k) Plan
Under the 401(k) plan, an employee can contribute upto a maximum of $17500 per annum. Employees who are aged 50 and above can make an additional contribution of $5500 annually. The joint contribution limit for the employer and the employee is $51000 for 2013. For those aged 50 and above this limit has been fixed at $56,500. The employer component comes in the form of matching contributions, non-elective contributions, and profit sharing contributions.
Investments under 401(k) plan
Under the 401(k) plan, the employer / employee contributions are invested in a diversified portfolio which includes investment instruments such as mutual funds, bonds, stocks, and other investment options which are permitted under the provisions governing 401(k) plan document.
Distribution Rules under 401(k) plan
There are specific distribution rules for 401(k) plan. Unlike, IRAs where a distribution can be made any time, under 401(k) plan a triggering event must occur in order to facilitate distributions.
So for 401(k) plan, a distribution can occur under the following conditions:
- When an employee retires.
- Upon the death of an employee.
- When an employee suffers from a disability as defined under the 401(k) plan.
- Upon separation of service with the employer.
- Distribution can happen when an employee attains the age of 59.5 years.
- When an employee experiences a hardship as defined in the 401(k) plan.
- When the 401(k) plan terminates.
Distributions are treated as ordinary income and attract a 10% penalty if the distribution occurs before the age of 59.5 years.
Loans under 401(k) plan
Loan under the 401(k) plan is available upon an employer’s discretion. So if an employer opts for no plan loans, then no loan can be availed. If a plan loan is allowed then it has to be paid within five years and then 50% of the employee’s vested balance can be accessed, provided the amount does not exceed $50,000. Under the 401(k) plan, if you take a loan for a home purchase, then it can be repaid over longer periods exceeding the five year cap. If any unpaid balance is left upon the end of the term, then it is considered as a distribution and will be penalized and taxed accordingly.
So you see that 401(k) Retirement Plan can be a major source of savings for your retirement planning. The 401(k) plan offers several benefits to employees such as tax advantage, investment customization, employer contribution, portability, facility of hardship withdrawals, and loans. Hence, if you incorporate 401(k) plan in your retirement planning, it would be a great step towards a happy and prosperous post retirement life.