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Overview
The 401k retirement plans, can get you free money from your employer, lower taxable income, savings and earnings without you bothering to make deposits. All this means a steady flow of income even after you retire from your work. 401k plans are from a bunch of retirement plans known as defined contribution plans in the US.
When you participate in a 401k plan, you can usually put up to 15 percent of
your salary into the account every month. But, the employer has the right to
limit that amount.
The 401(k) retirement plans are tax-qualified plans that are covered by ERISA and the assets held are generally protected from the creditors of the account holder, which in the past was not generally true for IRA plans.
How 401k Plan Works :-
According to 401 k Plans, your employer will:-
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set the eligibility requirements for you to join the plan
- specify the amount of money to be contributed on your behalf annually
- specify the circumstances under which you will receive these contributions
- state how you will collect these contributions
The 401k Plan Advantage
When you participate in a 401k retirement plan, you can usually put up to 15 percent of your salary into the account every month. But, the employer has the right to limit that amount. In 2006, the individual total annual contribution was limited by the IRS to a maximum of $15,000.
The money you contribute comes out of your check before taxes are calculated. This makes 401k
plans one of the most preferred retirement plans.
What happens to the 401(k) contributions?
The money is given to a third party administrator who invests it in
whatever combination of mutual funds, bonds, or money market accounts
your employer has decided to make available to you. You can choose the
type of investments you would prefer from a list of investment vehicles.
Remember to carefully read the guidelines so that you clearly understand
the level of risk you are taking as well as any fees associated with
each investment.
Is there any drawback?
Yes, there is one drawback. If you withdraw your 401(k) money before you
are 59.5 years old, you will have to pay tax on it and a 10% penalty to
the IRS.
How safe is my money?
The Employment Retirement Income Security Act (ERISA) includes
regulations that protect your retirement income. It requires all 401(k)
deposits to be held in custodial accounts to ensure the safety of your
investment. It is mandatory for your employer to send you an account
statement regularly and provide you with educational materials about the
investment opportunities within your plan.
Many employers in the US match a percentage of what their employees contribute to their
401(k) accounts. But, there's something called a ‘vesting schedule' which you should know about. For example, if your employer has a three-year vesting schedule, it will increase your ownership of the money by one-third each year.
After three years, the money is entirely yours and all future employer contributions towards the plan are solely yours. Of course, your personal contributions to the plan remain fully vested, irrespective of duration of stay with your employers.
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