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A 401(k) is a type of employer
sponsored retirement plan
that allows employees to save and invest for their own retirement. Through a
401(k), you can authorize your employer to deduct a certain amount of money from
your paycheck before taxes are calculated, and to invest it in the 401(k) plan.
Your money is invested in investment options that you choose from the ones
offered through your company's plan. You decide how much money you want deducted
from your paycheck and invested during each pay period, up to the legal maximum.
You also decide how to invest that money, choosing from your plan's different
investment options. The money you contribute to your 401(k) account is deducted
from your pay before income taxes are taken out. This means that by
contributing to a 401(k), you can actually lower the amount you pay each pay
period in current taxes. For example, if you earn $1,000 each paycheck, and you
contribute, say 5% ($50), you are only taxed on $950. You don't owe income taxes
on the money until you withdraw it from the plan, when you could be in a lower
tax bracket.
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What is
a 403(b) plan?
A 403(b)
plan is a retirement plan for certain employees of public schools,
employees of certain tax-exempt organizations, and certain
ministers. Individual accounts in a 403(b) plan can be any of the
following types:
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An annuity
contract, which is a contract provided through an insurance
company,
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A custodial
account, which is an account invested in mutual funds, or
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A retirement
income account set up for church employees. Generally, retirement
income accounts can invest in either annuities or mutual funds.
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Contribution Limit:
You can have your employer deduct a percentage of your pay before taxes and
invest that money into your retirement plan account, up to the amount allowed by
your plan. IRS announced it will leave the 401k limit at $15,500 for 2008. The
annual limit on catch-up contributions for those 50 and over will remain
unchanged at $5,000.
Your 401(k) fund pre-tax contribution limits set by the IRS for 2008 are:
$15,500 for those under 50 years of age
$15,500 plus $5,000 additional catch up contribution for those over 50 years of
age
There are several different limits that apply to a 401(k) plan in addition to
the overall contribution limit. These limits could result in a contribution
limit less than that specified by the IRS. Your plan administrator should have
written information about your particular plan that explains these limitations
as well as other regulations that apply.
Some companies offer a "match"
or "matching contribution" as an incentive to join the company
retirement plan. It means that the company will contribute a certain amount to
your account (usually between $0.25 and $1.00) for every dollar that you
contribute, up to a certain limit. The match formula can vary. To receive the
matching contribution, the plan may require that you work a specified number of
years. It makes good sense to take advantage of a company match by setting aside
the maximum amount required to qualify for a matching contribution. If your
employer offers a matching contribution, your savings can grow that much faster.
It's important to note that you may not
receive all of the matching contributions when you leave your job. That's
because most companies require you to wait before all of company's contribution
is yours (called vesting). There are 2 types of vesting: cliff
vesting and graded vesting. With cliff vesting you receive 100 percent ownership
of your company's matching contributions all at once and it cannot take more
than five years at the job. With step or graded vesting you gain ownership over
your company's matching contributions gradually. With each step, you get a
percentage of it. For example, 20 % in 2nd year at the job, 40% in 3rd year and
so on. Whatever vesting arrangement it uses, the plan must spell out all of the
details in its summary plan description.
Next-->>
Taking your money out from
your 401k plan
Related Articles:
All about 403(b)
Related Links:
Table of Contents:
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What Are Retirement Accounts?
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Employer Based
Retirement Plans
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401(k) Plans
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Individual Retirement Accounts (IRAs)
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Roth IRA
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What is a Rollover IRA?
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Converting and
Recharacterizing of an IRA
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Education IRA & SEP IRA
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Self Employed Retirement plan: Keogh
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