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401 (k) Plans
Human Resources » Compensation & Benefits


Chrm Message From: tesmian Total Posts: 63 Join Date: 02/08/2006
Rank: Manager Post Date: 02/08/2006 05:46:09 Points: 315 Location: Afghanistan

The 401(k) plan is a type of employer-sponsored retirement plan named after a section of the United States Internal Revenue Code. A 401(k) plan allows a worker to save for retirement while deferring income taxes on the saved money or earnings until withdrawal. As an employee benefit, a 401(k) must be sponsored by an employer, typically a private sector corporation

401(k) plans are retirement plans that are designed to encourage long-term retirement savings by employees. 401(k) plans need to meet a variety of rules contained in Section 401(k) of the Internal Revenue Code. But these be plans are very popular among companies and employees.

Here are the key features of such plans:

Employer contributions: The employer can contribute to the plan (subject to certain limits) for the employee's benefit, and the employee doesn't have to pay immediate income tax on that contribution.

Employee contributions: The employee can elect to contribute a portion of his or her salary to the plan, and then the employee doesn't have to pay immediate income tax on that contributed salary.

Investment of contributions: The employee can choose how to invest contributed money (in stocks, bonds, and other qualifying investments, for example).

Tax deferral: The taxes on the contributions and the plan's investment earnings are deferred until the employee withdraws them (generally at retirement).

Loan: In some instances, a participant may be able to take a loan against the 401(k) account, and as long as the employee repays the loan before taking a distribution from the plan, the funds remain tax deferred.

Withdrawals: Unless the employee is age 59½ or anther exception applies (such as total disability), withdrawals by an employee may be subject to both a 10 percent penalty and regular income tax.

Rollovers: Penalties and taxes generally do not apply if the employee changes jobs and "rolls over" his or her sums in the plan to the new employer's qualified plan that accepts rollovers. Penalties and taxes can also be avoided in certain circumstances for rollovers into an IRA.

When an employee leaves a job, the 401(k) account generally stays active for the rest of his or her life, though the accounts must begin to be drawn out beginning at age 70-1/2. The nature of a 401(k) plan can be drafted to accommodate certain employer needs, subject to qualifying with the appropriate tax rules.



Chrm Message From: steven Total Posts: 3 Join Date: 02/08/2006  
Rank: Beginner Post Date: 02/08/2006 11:00:19 Points: 15 Location: Afghanistan

Hello Tesmian,

To simplify & summarize this topic,  401(k) plan is a type of tax-qualified deferred compensation plan in which an employee can elect to have the employer contribute a portion of his or her cash wages to the plan on a pre–tax basis. These deferred wages  are not subject to income tax withholding at the time of deferral, and they are not reflected on your Form 1040 since they were not included in the taxable wages on your Form W-2. However, they are included as wages subject to social security, Medicare, and federal unemployment taxes.

The amount that an employee may elect to defer to a 401(k) plan is limited. Therefore, your elective contributions may be limited based on the terms of your 401(k) plan.

With regards,

Steve

Chrm Message From: somabiswas2005 Total Posts: 4 Join Date: 02/08/2006  
Rank: Beginner Post Date: 05/05/2011 03:30:06 Points: 20 Location: Afghanistan

Thanks, Guys.. for brief description abt 401(K) plan.

 

 

Chrm Message From: debora Total Posts: 108 Join Date: 02/08/2006  
Rank: Leader Post Date: 26/12/2019 10:10:13 Points: 540 Location: Afghanistan

  A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.

401(k) plans, named for the section of the tax code that governs them, arose during the 1980s as a supplement to pensions. Most employers used to offer pension funds. Pension funds were managed by the employer and they paid out a steady income over the course of the retirement. (If you have a government job or a strong union, you may might still be eligible for a pension.) But as the cost of running pensions escalated, employers started replacing them with 401(k)s.

With a 401(k), you control how your money is invested. Most plans offer a spread of mutual funds composed of stocks, bonds, and money market investments. The most popular option tends to be target-date funds, a combination of stocks and bonds that gradually become more conservative as you reach retirement.

While a 401(k)can help you save, it has plenty of restrictions and caveats. In most cases, you can’t tap into your employer’s contributions immediately. Vesting is the amount of time you must work for your company before gaining access to its payments to your 401(k). (Your payments, on the other hand, vest immediately.) It’s an insurance against employees leaving early. On top of that, there are complex rules about when you can withdraw your money and costly penalties for pulling funds out before retirement age.

To oversee your account, your employer usually hires an administrator like Fidelity Investments. They’ll email you updates about your plan and its performance, manage the paperwork and assist you with requests. If you want to keep watch over your account or shift your money around, go to your administrator’s web site or call their help center.

With that settled, how much should you put in? As much as possible, being mindful that you’ll need to have enough money to live, eat and pay down any debt you have. At the very least, invest enough to get the full matching amount that your company pays to match your contributions. 

So how would a 3% match work? If you put in 3% of your $50,000 salary, or $1,500, your company puts another $1,500 in the pot. You can add more than that $1,500 yourself, but the company won’t match beyond 3%. The rules for matching funds vary, so be sure to check with your employer about qualifying for its contributions.