Saving For Retirement With The 401K Retirement Plan
A 401K plan is a savings plan that is designed to mature at a persons retirement. It was introduced to American workers in the 1980s and eventually became an alternative to the regular retirement plans. There are currently three different types of 401K plans offered by employers.
The money deposited into these types of account are not available for withdrawal until a certain date of maturity. If an employee needs to access their funds before the age of 60 it is considered an early withdrawal and penalties are applied. Penalties and fees are charged according to the amount of money that is withdrawn; and are standard within the industry. People who selling annuities will know that the difference with 401Ks is that there are tax advantages.
In most cases 401K funds do not get taxed until they are withdrawn from the account. An employee can choose to have them taxed before hand if they wish. In order to avoid surprises at tax time, many people choose to save the amount they estimate with be due at tax time in a separate account for any money that will be withdrawn.
There are quite a few employers that will match the funds that employees are investing. With a employee-directed setup there are opportunities to purchase company stocks, as well as different areas of investment through 401K plans. The availability of stock options and investment opportunities vary with each individual company. This is a benefit that people with a trustee managed plan do not have.
Once an employee has retired they must start to distribute the money in their 401K account by the age of 70 in most cases. There are exceptions for those who are still working. A tax professional can help to set up the disbursement schedule if needed.
When a person is no longer employed by the company that holds their 401K, they can choose to roll it over or cash out. The roll over option is not always available at all places of employment so it is recommended that employees ask. If a cash out is chosen, the minimum balance must be at least 1,000 dollars or the funds can be forfeited.
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