Personal Finance Answers

Posts Tagged ‘401K’

A 401k is a good place to start in planning for your future retirement, no matter how far away you may be from the actual time. A 401k account is a special type of savings account that is funded directly through your paycheck each pay period. How it works is that you and your employer determine the amount that is to be deducted from each paycheck you receive, then the employer determines your pre-tax earnings and deducts your 401k funds from the paycheck prior to taxes.
Once deposited in the special savings account, the funds in the 401k are then invested into many different types of mutual funds, bonds, and stocks. The great thing about a 401k retirement plan is that all of these investments are completely free of taxes until the time comes for you to withdraw your money from the 401k account.
Beginning in the early part of the 1980’s congress created the 401k retirement plan to allow people to begin saving money before they retire from their employment. It works as something of a financial net, ready for you when the time arrives.
There are several advantages with a 401k other than simply being a tax-exempt method of savings. Your employer may also have a match program. With this program, your employer would match part of your contribution into 401k. This means that whatever you contribute to your 401k, your employer will match a portion of it each pay period. Additionally, some employers raise the amount of their contribution when you have worked for them a certain number of years.
Another exciting aspect of 401k is that you have the option to determine where your funds will go when it is invested. To some, this is important and gives them the opportunity to maximize their retirement savings.
Furthermore, 401k has portability. If you should ever change jobs, you have many different options available in regard to your 401k. One of these options is to simply leave your 401k with your previous employer. This is the easiest option. However, you should be aware that the plan administrators could charge you for maintaining the account records. Another option is to roll the 401k over to the new employer’s plan. This will allow you to continue to deposit money into your 401k to add to the money you have already earned and saved.
You may also be able to rollover the 401k into an IRA. This is a great option, especially if employers only offer limited investments. You would have greater control over where your money is invested. Last, you could opt to completely cash the 401k out. This option has a few drawbacks. When you cash out your 401k plan, you must pay the taxes on that money and you could also be accessed a penalty for early withdrawal.
It is extremely important that you fully understand all of your options. Weigh the results of each one prior to making any decision about your 401k. Being educated, practical and informed before making your decision will help benefit your 401k and retirement in the long run.
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I have recently changed jobs and would like to know if the annual limit still applies to my 401K. Read more...

Cashing a 401k because you need money now will hurt you in the future. If you have a way around doing this you should seriously consider your options.

If your retirement plan is the only way for you to obtain money you can look at ways around withdrawing money directly.

Some plans allow you to take out loans from the account. There are always limits on this, it can usually be up to 50% of the account total, or $50,000, whichever is less. You have to repay this money within five years, but the interest rates are always very low and the interest you pay goes directly into your retirement plan. If you don’t manage to repay all of the money within the five year limit then whatever balance you still have left is treated as though you directly withdrew it in the first place, and you will be charged an early withdrawal penalty and taxes, which can easily total up for thirty to forty percent.

Another option instead of cashing a 401k if you need money now because you have medical bills or may lose your home is to apply to take some money from your retirement plan under conditions of economic hardship, but the same rules about repayment as above typically apply.

If you decide to withdraw from the account you’re going to lose a lot of money. There is a 10% early withdrawal fee for anyone who withdraws before turning 59 1/2 years old and on top of that there are state and federal taxes that have to be paid. Depending on your income bracket and state tax percentage this can easily total thirty to forty percent. It shouldn’t be overlooked that you’re also going to be missing out on the money that would have invested and grown over the years into a nice nest egg for retirement.

For all of these reasons if you’re looking to be cashing a 401k because you need money now, consider your other options first.

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can some one please explain me in simple terms what is a 401k ..
how does it benefit us
how to select the best 401k plan..
can we opt out of 401k plan..
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Image taken on 2006-01-05 07:47:39 by Sarah_Jones. Read more...

And by individual stocks, I don’t mean the company’s stock. I’m talking about non-employer stocks traded on an exchange. Read more...

What happens to my 401k plan if I decide to leave USA and go back to Indonesia. I have my 401k plan for about 5 yrs. What are the consequences and how should I save from getting penalised ? I am resident in USA and 35 yrs of age.
(from Yahoo Answers)

Image taken on 2009-05-04 05:51:29 by FunnyBiz. Read more...