What exactly is a 401(k) plan?

  • A “defined contribution: employee benefits plan offered by many employers
  • “Defined contribution” means that employees contribute their own money to the plan, normally through payroll deduction

Benefits of a 401(k)…

For the employer

  • It attracts and retains employees
  • Helps their employees plan for retirement
  • Gives their employees a choice in their financial future
  • Tax benefits

For the employee

  • Simplifies investment decisions
  • Immediate investment return
  • Withheld from your paycheck so you never see it or have a chance to spend it
  • Both you and your spouse can each have a 401(k) account
  • Tax deferred- you do not pay income taxes on the money when you contribute it but instead you pay taxes when you withdraw it at retirement
  • Since you don’t pay taxes on the money when it is withheld, it lowers your net income tax bill
  • The money in you 401(k) account can be invested in a number of mutual finds- helping the money grow faster
  • The interest you earn on the money is also tax deferred until you withdraw it

A 401(k) plan makes it possible to have more money in your paycheck. This is because with 401(k)s you can increase your take home pay and decrease your current taxable income.

ABCs of 401(k) plans…

  • Automatic payroll deductions
  • Brokers or portfolio managers manage your account rater than your employer
  • Contribution can be accessed in case of emergencies (loans and withdrawals)

Withdrawing your 401(k) money

  • At age 70 1/2 you can withdraw all or part
  • Income tax costs begin with withdrawal
  • A penalty for early withdrawal prior to age 59 1/2
  • Most plans let you borrow money from your 401(k) plan- you must repay to avoid penalties

Qualifying Hardships for Qualifying 401(K) Withdrawals

401(k) Loans