Are You Getting the Most Out of Your 401k?
Let's face it: Most people working today do not depend on a traditional employer pension for retirement, and future of social security is in doubt. The Americans know, and still appallingly high percentage of us choose not to participate in our employer-sponsored savings plans such as 401k.
Well, its time to stop procrastinating. If your employer does not offer a 401k, it's time to sign up and start saving. In most cases, a 401k is a good investment vehicle for retirement savings and should not be ignored.
What is a 401k?
Over the past 25 years, employers have increasingly away from so-called "defined benefit" to the pension "defined contribution" plans. And under the old defined benefit plan, the employer is responsible for a fixed monthly payment and benefits for retirees. These are the types of pensions that GM and Ford are in serious difficulty.
Defined contribution plans, however, simply require the employer to make a fixed contribution to the retirement savings of an employee under the worker's employment. The most popular defined contribution plan is the 401k, so named for his chapter in the tax code.
For example, an employer may offer a 401k match. In this case, the employee may decide to contribute 11 percent of his winnings to his 401k and the employer agrees to match all contributions up to six per cent.
The employer may choose to offer a match to a certain percentage of pay or choose not to provide a match at all, but we must make the plan corresponding to the same provision for all employees on a non – discriminatory. In this way, the 401k is considered a non-qualified.
The 401k – Pros …
For the employee, the main advantage of the 401k is the match by the employer assuming, of course, that the employer offers a match. With few exceptions, everyone must fully fund their 401k match up to their employer. Otherwise, the employee is just throwing money free.
For the employer and employee, 401k offer the benefit of tax exemption. The employee contributions are tax deductible, which means that all contributions to a 401k does not meet the tax on personal income, even if they do not face the social security and FICA taxes.
For the employer, the case is even better because they are not even responsible for their half of Social Security and taxes on contributions to FICA employee's 401k. This makes financing cheaper 401k to an employer to pay the employee wages of an employee.
Finally, employees are owners of their 401K, as opposed to traditional pensions, which are owned by the sponsoring corporation. Own employee contributions are immediately its own, while employer contributions are vested over time.
In practice this means that an employee of five years or more generally has all of his 401k, even if he or she were to be fired. In fact, 401k is transmissible to the heirs of a person to death, while traditional pensions in May paid a survivor's benefit only the spouse of the owner in most cases.
. . . And the cons
On the negative side, 401k holders are generally limited in their investment choices. This gap is particularly evident when the employer does not match employee contributions. In such a scenario, the employee is more likely to fully finance a self-directed Roth IRA, in which he or she will have more control over their investments.
In addition, while withdrawals from a Roth IRA are completely tax free at retirement, 401k withdrawals are fully taxable to the individual tax rate individuals. For most people, it makes a Roth IRA a better vehicle than 401k.
However, if your employer offers a match, you will almost certainly enjoy. Even putting money into a savings or money market account provides a strong performance when your employer offers a match. In addition, you can (and should) have a Roth IRA on the side.
So now you know some facts behind the 401k, consult your HR person as soon as possible and get signed up. It is never too late to start planning your retirement, but the sooner the better. Do not wait another day to start your 401k!
