401K Benefits

401K Benefits

All about 401K Benefits – There are many advantages to having a 401k plan, both for the employer and for the employee.

Since the program was created in 1978, it grew immensely; in 2017 401k retirement accounts accounted for $5.3 trillion in retirement plans in the U.S.

Total 401k plan balances grew by more than 100 percent from 2008 to 2017.

These are signs of the obvious: 401k benefits are one of the best retirement plans in the U.S and U.S citizens know it.

401K Benefits – ERISA protection

The average employee falls under the protection of the Employee Retirement Income Security Act (ERISA).

There are some requirements most 401k plans must meet in order to not be disqualified as such.

One of these requirements is that tests have to done each year, to confirm that High Paid Employees (HPE) aren’t being favored by the plan.

That is why these tests are called “Nondiscrimination tests”. This test is divided in two tests: the ADP and ACP tests.

ADP stands for Actual Deferral Percentage and it tests if there is any disparity in terms of deferrals between HPE’s and non-HPE’s.

ACP stands for Actual Contribution Percentage and it checks if there are disparities between the proportion between the contributions by HPE’s and non-HPE’s.

401K Benefits for the Business

The 401k is not only famous because of the benefits employees receive; there are advantages for the business involved as well.

There are incentives for starting a plan, such as tax credits.

A good retirement plan such as the 401k plan attracts and keeps employers, since there is a fine for employees who withdraw their savings too early.

Furthermore, the assets in the plan are tax free and the employer contributions to the plan are tax reduced.

Important to note, you can set up the plan even if none of your employers want to participate.

But do not forget that there are heavy fines for business owners who do not properly give the eligible employees the option of joining.

Match contributions

A matching contribution is an optional benefit that you might receive from your employer; it is essentially free money.

There is a flexible range for the percentages your employer may choose to pay you based on your own contributions.

The most common matching scenario is one where your employer pays 50% of what you contribute with, but no more than 3% of your salary.

In some rare cases a company may match the employee’s contributions dollar by dollar.

Tax benefits

The money which you contribute to your 401k retirement is pre-taxed, in other words, you lower the amount of income you pay taxes on.

Of course you will pay taxes for that money eventually, but only when you retire and withdraw your money.

The advantage of that is that when you retire your monthly income will be lower, putting you in a lower tax bracket.

As a result, you pay less taxes for that money than you would pay if you had to pay while employed.

Compound interests

Compounding is a mathematical phenomena that is at the core of all economy. It represents a situation where money grows on top of itself.

The amount at which your 401k contributions compound depends on the type of investments you make.

If you keep earning an steady interest on your money for a long period of time it will grow at an exponential rate.

It works like this: your money grows in one year due to some percentage of interest. And in the following years the interest may not change.

However, in the next year the same percentage will be applied to last year’s growth. And so on, until you end up with much more money.

Compound interest is one way your savings can increase immensely.

Access to loans

Even though you may not be able to make withdraws from your account before a certain age without receiving a penalty, there is an option.

In fact, in some cases, the option is more advantageous than simply retrieving your money. You can borrow from your own account.

It’s more advantageous because you won’t have to pay taxes, you just have to deposit the same amount you borrowed back in your account.

Transitioning plans

It is not nice when for one reason or another you need to leave your job and abandon your plan, except that you don’t have to abandon your plan.

This is because you can transfer your plan to your new workplace, assuming your new employer also offers a 401k plan.

In case you are not offered a 401k plan, you can transfer the money into an Individual Retirement Account (IRA), and cash it later.

Also, if the the vesting period of your plan is already done, you can also keep the money on the same plan and then retrieve all of it when you retire.

If your investments are under 5000 thousand dollars your employer can initiate a IRA rollover for your.

In case you do not respond to the notification letter in 30 days he can send the check directly to you.

IRA transfer or rollover

The last paragraph briefly touched on the possibility of transferring your account to an IRA but there is more that you need to know about this option.

A good reason to choose this option is because it avoids the 20% federal withholding the administrator would be required to send to the IRS.

Also important to note, you’re not affected by the 10% early-withdrawal penalty for withdrawing your funds before you reach the age of 59 years and 6 months old.

You can do it yourself as well; you will have a 60 day period of time to transfer your balance to an Individual Retirement Account.

So, if you learn more about Social Security, click here.

So, if you liked the article or interesting, please click LIKE and SHARE with your friends. This way, you will be helping more people and making the world a better place.


You might also like

Leave A Reply

Your email address will not be published.

This website uses cookies. Ok Read More

Privacy & Cookies Policy
error: Content is protected !!