WHAT
IS A 401(k) PLAN?
The
401(k) plan is a type of employer-sponsored contribution
retirement plan defined under section 401(k) of the
Internal Revenue Code (26 U.S.C. § 401(k)). The
401(k) plan is by far the most popular type of retirement
savings plan used by Americans today.
A
401(k) plan allows a worker to save for retirement while
deferring income taxes on the saved money and earnings
until they are withdrawn. The employee elects to have
a portion of his or her wage paid directly (taken from
his/her paycheck) into his or her 401(k) account. In
participant-directed plans (the most common option),
the employee can select from a number of investment
options, usually an assortment of index funds or mutual
funds that emphasize stocks, bonds, money market investments,
or some mix of the above. Every company uses a different
custodian and each custodian will offer different options
in which employees can invest their monies. Many companies'
401(k) plans also offer the option to purchase the company's
stock with unique preferences. For more details about
your plan see your custodian or your employer's trustee.
Typically,
the employee can generally re-allocate money among these
investment choices at any time. In the less common trustee-directed
401(k) plans, the employer appoints trustees who decide
how the plan's assets will be invested for all employees.
For
many Americans, a properly used 401(k) plan is an integral
part of retirement. But just because your employer offers
a 401(k) or other deferred compensation plan (like a
403(b)), that doesn't mean there's anybody in your office
that will tell you what to do with it. This is where
a competent financial advisor might be useful... or
you could call us now and we would be glad to help you
understand it a bit more.
What
are the benefits of a deferred retirement plan like
a 401(k)?
If your employer matches your contributions to your
401(k) this really should be the first place to devote
every dollar that you can afford to lock away for the
long term. Why? Well, you're staring at free money,
and you shouldn't just stare at free money -- you should
take it. Other advantages of an employer-sponsored plan
include:
Tax
deduction: the money you contribute to the
employer plan is not included in your income for tax
purposes.
Tax-deferral: you don't pay taxes
until you retire; that leaves more of your money to
grow through the years
Automatic investment: the money
is transferred directly from your paycheck to your
account; no checks to write, no monthly reminders,
no paper cuts to the tongue while sealing the envelope.
Making
your employer's plan the first stop applies only to
those dollars you defer that are joined by matching
dollars in your account. Check your plan. For instance,
if the employer offers a match only up to the first
$3,000 that you contribute annually, but you're contributing
$5,000, those $2,000 unmatched dollars might very well
be put to even better use elsewhere.
So... where might your money be better off?
Well, for starters you will want to understand
that monies in your 401(k) plan can be rolled over into
a self-directed
401(k)-plan (traditional or Roth) at any time with
very few restrictions. Or you may rollover the funds
at any time, without any restrictions at all from your
employer's custodian, into the type of account we most
often recommend to our the clients: a self-directed
IRA (traditional or Roth). Furthermore, there is
no rule against having multiple retirement accounts.
If you have a 401(k) and you are contributing the maximum
that is matched by your employer, then you can contribute
more monies to a separate retirement account -- namely,
a self-directed
Roth IRA!
DISCLAIMER:
WN Funding or its affiliates hold
no licenses for financial planning and WN Funding is
not a registered security with the Securities &
Exchange Commission.
None of the information on this website should be
viewed as tax or legal advice. Please be sure to consult
your attorney, accountant, and/or other licensed professional
needed before considering any investment or conversion.
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