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1. What is a good pre-tax percentage to invest if I decide to
contribute to my 401(k)?
This is a difficult question to answer and depends on your current financial
situation, spending patterns and how reliant you plan to be on your 401(k) for
retirement, but a good rule of thumb is, 'The sooner you start saving?-the
better'! If you do plan to invest in your 401(k) you should consider maximizing
your company's match. As an example, if your company matches dollar-for-dollar
up to 5% of your gross salary, you should contribute at least 5%. If your
company is willing to contribute to your 401(k) plan, make the most of it!
2. Just how much can I contribute to my personal 401(k) account?
The maximum amount of your pre-tax dollars you allowed to contribute is set by
the US Government and adjusted for inflation annually. For example: the 2006
pre-tax contribution limit you can put in your 401(k) is $15,000.
If you are age 50 years or older you may also make an additional 'catch-up'
contribution of a maximum of $5,000 per year. Keep in mind that some plans may
offer you the option to contribute on an 'after-tax' basis and in this case, the
$15,000 limit does not apply. You should also know that some 401(k) plans may
restrict your yearly contribution to an amount less than $15,000, and may also
elect not to permit you to make 'catch-up' contributions.
3. What if I want to take money out of my 401(k) while I am still employed?
Ideally, you should budget a large enough percentage of your pre-tax income so
that you don't have to withdraw money from your 401(k) account, but if you do
have to, there will be some penalties. Generally, certain plans offer personal
loans allowing you to borrow funds in your 401(k) account, but keep in mind you
have to pay yourself back, with interest. The bad news is: if you fail to pay
back the loan as agreed, the amount you took out will be treated as a
'withdrawal' and the remaining loan balance will be subject to income tax as
well as a 10% 'early withdraw penalty'.
4. What happens to the money I contributed to my 401(k) if I leave the
company or am terminated?
The good news is: your options are the same whether you leave or are terminated.
If your 401(k) account balance is more than $5,000, you can simply leave your
money in the plan and continue on. If you want to take your money with you to
the next company or another plan, the money you contributed can be 'rolled' into
another 401(k) plan with your employer or put into an IRA to avoid early
withdrawal penalties.
5. What's the difference between a 401(k) plan and my
company's profit sharing plan?
A "profit sharing plan" is a type of retirement plan. It allows an employer to
share profits of the company with employees by contributing a percentage of the
company's annual profits to the plan. The amount of the contribution can change
each year, or may not be made at all, depending on the company's circumstances.
A 401(k) plan is a feature of a profit sharing plan or a stock bonus plan.
Unlike a profit sharing plan, however, employees can contribute a percentage of
their own salaries (up to certain limits) to the plan for retirement savings.
401(k)s also allow employers to contribute money to its employees' accounts in
the form of "company match" contributions, usually as an incentive to get
employees to participate in the plan. Current income taxes are deferred on both
employer and employee contributions and all investment earnings, until the money
is withdrawn from the plan.
Next-->>
Individual Retirement Accounts
Related Articles:
All about 403(b)
Related Links:
Table of Contents:
-
What Are Retirement Accounts?
-
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
-
Self Employed Retirement plan: Keogh
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