A longer healthier life translates inevitably into additional years in retirement. This is the phase of life for which you have to provide income if you are to relax and enjoy these twilight years of your life. The Social Security provisions are not enough to live the comfortable life which you were used to during your working years. You need something more and that’s where Plan 401(k) comes in. This is the powerful retirement tool that can provide you with that extra income.
The Plan is similar to the IRA account which is also, basically a retirement savings plan. However, Plan 401(k) is employer initiated and usually funded with your pre-tax salary contributions and also at times with equal employer contribution. All contributions and growth of funds under Plan 401(k) are not taxed but any of the amounts once withdrawn is taxable according to prevalent tax laws. However, withdrawals cannot be effected before the age of 59 1/2 years unless under special circumstances. The employers have now started to include some special loan provisions for withdrawals in this Plan.
Your contribution to this account is limited to some percentage of your pre-tax salary. This year it is $ 15,000 which is the maximum amount allowed legally. This limit may increase or decrease depending on further IRS notifications. However, if you are 50 years or older you are allowed to contribute additional amounts, which will be over and above your regular contribution, to make-up for earlier years. But you need not wait to be 50 years old to be eligible to join the Plan. You are eligible, if you are 21 years of age and an employee of an organisation that offers this Plan to its employees. But at the same time you have to be an employee of the company for a period of time not exceeding one year.
As for the employer’s contribution, it varies from employer to employer. There are those who contribute 25 to 50 per cent of your own contribution. That too is limited to some extent. At the same time under Plan 401(k), you will not be able to withdraw the company’s share of the contribution unless you have worked in the organisation for a sufficient or specified number of years.
The investments which you make for your funds in Plan 401(k) should be selected carefully. One of he reasons for this is that 401(k) options are not federally insured and any mistake is liable to prove costly. A good and planned investment strategy will definitely help to add growth to your existing investments. All help, professional or otherwise should be taken and will prove beneficial to you.
In case you have the time, about 12 to 15 years, invest in the stock mutual funds. These are generally better performers in the long run. Stock mutual funds many a time give far better results than other options. One of the reasons for selecting this option is that Plan 401(k) does not allow frequent transfer of funds from one option to another. However, in case you leave your present employment, Plan 401(k) allows you to transfer your investment your new employer provided the transfer goes directly from your present employer to your new employer without any withdrawal.