Simplifying The 401(k) Retirement Plan

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Simplifying The 401(k) Retirement Plan
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• The 401 (k) retirement plan came into existence
  back in 1978, and ever since its inception, has
  proved to be the single most popular type of plan
  of its kind, with no other employer-sponsored
  retirement plan in America able to compete with
  it.
• The money that millions of employees have saved
  in these plans, are done so to enable them to
  provide for themselves during their retirement
  years, and many employers use the plan to
  distribute company stock to their workers.
• The 401 (k) plan in its simplest form
• A 401 (k) can be defined as an arrangement that
  enables employees to select whether they take
  cash compensation or defer a percentage of it to
  a 401 (k)

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• account under the retirement plan. If deferred
  the amount is generally not subject to taxes
  until the employee withdraws it or distributes it
  from the plan. That said, if the plan allows it,
  a worker can make 401 (k) contributions on an
  after-tax basis, in which the amounts when
  withdrawn, are usually tax free.
• Regulations stipulated in the Employee Retirement
  Income Security Act of 1974 and the Tax Code
  govern the 401 (k) plan which is known as a
  qualified plan. Qualified plans can either be
  defined contributions or defined benefits
  pension plans, and 401 (k) plans are a type of
  defined contribution plan. This means that the
  person participating in the plan, has a balance
  determined by contributions made to the plan and
  the performance plan of investments.

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• The employer isnt required to contribute towards
  the plan, as is often the case with pension
  plans, but they often opt to match their workers
  contributions under profit sharing feature.
• Limits to contributions
• At the time of writing, the most compensation
  that an employee can defer to a 401 (k) plan is
  18,000, with workers aged 50 or above by the end
  of the year, able to make extra catch-up
  contributions of up to 6,000. The most that
  employer/employees can jointly contribute is
  53,000, with the amount being slightly higher
  for those aged 50 and above.

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• Rules of distribution
• IRAs have a different set of distribution rules
  to 401(k) plans the money in the plan grows as
  tax-deferred, just as with IRAs, but a
  triggering event must be applicable for
  distributions to occur from a 401(k), unlike with
  IRAs where distributions can be made at any
  time. Due to this restriction, 401(k) assets can
  only be withdrawn under a set of conditions
• The employees retirement, death, disability or
  separation from service with the employer
• When the employee reaches the age of 59 ½
• If the employee experiences a qualifying hardship
  as defined under the plan

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• When the plan is terminated
• For the most part, retires who draw income from
  their 401(k)s, opt to roll the amounts over to
  traditional IRAs or Roth IRAs. Rollovers enable
  them to avoid the limited investment choices that
  are often presented in 401(k) accounts.
• The last word on 401(k) plans
• Its estimated that this type of plan will
  continue to play a major role in the retirement
  planning industry for the foreseeable future, and
  for more details about 401(k) plans, please make
  an appointment to speak with a professional tax
  advisor and have them explain it to you in
  further detail.

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