FINANCE
MAKING CENTS WRITERS: THOMAS H. RUGGIE, CHFC, CFP
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ne of the most important benefits a company can offer its employees is a 401(k) plan. Such plans have become the primary way workers prepare for retirement, so it’s important to know that specific features can differ — sometimes significantly — from employer to employer. Being familiar with your 401(k) is the best way to make sure your retirement savings are working in your best interest.
to begin contributing immediately; others require new hires to wait three months to a year. About 30 percent of employers automatically enroll workers in the company 401(k) plan unless an employee opts out.
you take withdrawals from the plan. Contributions to a Roth 401(k)s are not tax-deductible. They don’t give you an upfront tax benefit; however, distributions are tax-free.
MAXIMUM CONTRIBUTIONS
VESTING
At this time, you can put up to $17,500 a year into your 401(k). If you’re age 50 or older, you may qualify for additional “catchup” contributions that allow you to sock away more.
Even if your employer makes a contribution to your 401(k) account, there could be a vesting schedule in effect, depending on the type of plan. A vesting schedule is the amount of time your employer requires you to be at the company in order to walk away with 100 percent of your matching contributions. Check with your employer to see if this applies to your plan.
YOUR 401(K) RETIREMENT PLAN A 401(k) — and its sister plan for nonprofit organizations, the 403(b) — is a retirement plan in which you participate through your employer. Such plans allow your employer to contribute a portion of your paycheck to the account. Contributions can be made only through payroll deductions, unlike contributions you make to an IRA or brokerage account. When you sign up for a 401(k), you receive a menu of investment options from which to choose. You’re responsible for picking investments that are most suited to your risk tolerance and retirement objectives.
ELIGIBILITY DATE When you can start contributing to your 401(k) varies with companies. A little more than half of plans allow new employees
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EMPLOYER MATCHING Some employers will match what you put in — otherwise known as free money. The most common 401(k) match is 50 cents for each dollar contributed up to 6 percent of pay. Here’s how that breaks down: If you make $50,000 a year and contribute 6 percent of that amount, or $3,000, of your own money, your company would kick in 50 percent, or an additional $1,500. Matching funds from your employer don’t count toward your maximum contribution.
TAX BENEFITS Regular or traditional 401(k) retirement accounts allow you to contribute money on a pretax basis. You don’t pay income tax on the amounts you contribute, nor do you pay tax on investment gains in the account — until
EARLY OR LATE WITHDRAWALS A 401(k) is not like a savings account, from which you can withdraw money at any time. The IRS prohibits you from withdrawing funds before age 59½, except in extreme cases — and even then you may still have to pay an early-withdrawal penalty. Once you reach 70½, you must start taking required minimum distributions or face steep penalties. Many, but not all, plans allow you to make hardship withdrawals for certain immediate financial needs, such as preventing foreclosure or paying medical bills, for a funeral, or college. If you qualify