401k Basics

A 401k helps workers in the United States save money for their retirement while having the savings invested and income taxes deferred on that money until the time of withdrawal. A 401k is helpful for employees when saving money because the money that is placed in the 401k is taken directly from their weekly, biweekly, or monthly paycheck and placed in the 401k. This process is known as deferring money from a paycheck.

The most common option for 401k plans are the participant-directed plans. This plan allows the employee to select from a number of investment options for their money including mutual funds, stocks, bonds, money market investments or a mix of all the above. A lot of companies in the United States also offer their employees the option to purchase the stock of the company they work for as part of their 401k package. Income tax is withheld on the income in the year it is contributed to the 401k and the money is not taxed until the money is withdrawn from the account.

Its is important to understand the 401k basis to maximize savings for retirement. The following important topics are address: 401k hardship withdrawal, 401k employer match, and 401k bankruptcy protection.

401k Hardship Withdrawal

Most companies in the United States do not allow their employees to touch their 401k before the age of 59.5 and if they do make a withdrawal before that age they will either be penalized or taxed by the government. Some companies do allow their employees to make a hardship withdrawal from their 401k plan. A hardship withdrawal can be made if an employee is facing immediate and heavy financial needs such as the terminal illness of a family member or in the event of a fire at the employee’s home. Hardship distributions from a 401k are limited to the amount of the employees’ elective deferrals only. They do not include any income earned on the deferred amounts.

401k Employer Match

401k plans were created by the Federal government in 1978 with the Tax Reform Act. A section of the Tax Reform Act was instituted to help employees save more money for retirement and 401k got its name from its section number and paragraph in the Internal Revenue Code (section 401, paragraph k). Some of the benefits of a 401k plan are free money from an employer, lower taxable income, savings that accumulate without the employee having to make a deposit and the opportunity to retire without having to worry about money. What does free money from an employer mean and where does it come from? The free money comes from the amount of money that the employer matches with each deposit into the account. An employer will make it known to the employee when they are hired how much the company will match when an employee deposits money into their 401k plan.

401k Bankruptcy Protection

An employee’s 401k plan is protected from an employer filing for bankruptcy. The Employment Retirement Income Security Act was passed in 1974 to protect an employee’s income that is deposited in a 401k plan. The Act requires that all 401k plans be placed in custodial accounts in the event that something happens to the employee’s employer. For the most part, an employer allows an employee to deposit 15 percent of their annual income into their 401k plan. The IRS limits the amount of money that can be placed in a 401k to 100 percent of an employee’s salary, or $44,000 per year, whichever one is less. This includes what the employee contributes to the 401k as well as what the employer contributes to the employee’s 401k plan. Employees should always increase the amount of money they are depositing into their 401k plan when they receive a raise from their company. It is possible for employees to have saved anywhere from one to two million dollars once in their 401k plan by the time they decide to retire from their job.

• Do you need assistance regarding employment laws? If so, contact an experienced Employment Attorney in your area today!