LEARN HOW THE 401K RETIREMENT PLAN WORKS

0
39

In 1978, the US Congress decided that Americans needed a little more incentive to save more money for retirement. They figured that if they gave people a way to save for retirement while lowering their state and federal taxes, they could take advantage of it. The Tax Reform Act was then passed. Part of it authorized the creation of a tax-deferred savings plan for employees. The plan is named after its section number and paragraph in the Internal Revenue Code – section 401, paragraph (k). Hence came the name 401K. Ted Benna, who was a benefits consultant, came up with the first version of this plan. His plan was officially accepted by the Federal Revenue and the proposed regulations were published in 1981. In 1982, taxpayers were able to take advantage of this new plan for the first time. It took nearly 10 years, but the final regulations were published in 1991. Four things set a 401(k) plan apart from other retirement plans.

  • And after all, how does “Social Security” work in the US?

1. When you participate in a 401(k) plan, you tell your employer how much money you want to go into the account. Generally, you can deposit up to 15% of your salary into the account each month, but your employer has the right to limit this amount. The IRS limits your total annual contribution to $18,500 per year. 2. The money you contribute comes out of your check before it’s calculated, and more importantly, before you’ve had a chance to get your hands on it. This makes a 401(k) one of the easiest ways to save for retirement. 3. If you’re lucky, your employer will match a portion of your contribution. The matching amount they offer (the free money part) is your incentive to participate. 4. Money is given to a third-party trustee who invests in mutual funds, bonds, money market accounts, etc. They don’t determine the investment mix – you do. They usually have a list of investment vehicles you can choose from, as well as some guidelines for the level of risk you are willing to take. The downside to the 401(k)? If you withdraw your money before you turn 59.5, you will have to pay tax on it PLUS a 10% penalty to the IRS.

  • Financial Health: Building wealth

How safe is your money?

What if your employer declares bankruptcy? How do you know your money is safe? The Employment Retirement Income Security Act (ERISA) that was passed in 1974 includes regulations that protect your retirement income. Requires that all 401(k) deposits be kept in escrow accounts in order to keep your money safe in case something happens to your employer. It also sets out requirements your employer must follow, such as sending regular account statements, providing easy access to your account, and maintaining compliance so that the plan is fair for everyone in the company. It also requires your employer to provide you with educational materials about the investment opportunities in your plan. The only thing you are not exempt from is the natural risks of the stock market. But if you have an employer that offers the “match”, be sure to contribute… nobody says no to free money!!! Have a super productive week!!!