401K Plans

401K Plans

All about 401k Plans – Even though the traditional 401k plan is already good and offers many benefits, there are variations to it, created to fit workers with different needs.

For example, maybe you want to pay taxes after you withdraw your contributions or maybe you want to withdraw the money before retiring .

In order to help you to deal with situations like that, this article will summarize everything you need to know.


What is the Traditional 401k plans?

The 401k plan is a employer-sponsored plan, developed to help workers retire with dignity.

It allows workers to save or invest their own paycheck. The money invested is tax-deferred.

That means that the contribution is made before taxes are applied.

In the future, when the worker withdraws it, the taxes will be applied.

The advantage proposed by this plan is that when you get older your income tax bracket is going to be lower than it is now, and you will pay less taxes.

Another advantage is that you can earn much more money if you invest your contributions wisely.

Receiving a percentage of interest over your contributions annually will make your money grow exponentially.

The Roth 401k plans

This plan is best suited for those who think they will have a higher tax bracket after retirement.

The plan is a twist on the traditional 401k plan; it allows the withdrawal of contributions without income tax assessment if certain conditions are met.

However the contributions will be taxed before they are made.

For the withdrawal not to be taxed it needs to be a Qualified Distribution . For it to be a Qualified Distribution it needs:

  • To happen at least five years after the owner established their first Roth IRA.

And one of the following requirements needs to be met:

  • The plan’s holder must be at least age 59 and five months when the withdrawal is made;
  • Assets limited to $10,000 are used towards the purchase or rebuilding of a first home for the plan’s holder or a qualified family member;
  • The distribution occurs after the plan’s holder becomes disabled;
  • The assets are distributed to a beneficiary of the plan’s holder after their death.

It is a good move for taxpayers currently facing lower tax rates, to invest in after-tax programs such as the Roth 401k plan.

Self Directed 401k plan

The Self Directed 401k plans are the best choice for those who want more freedom with their accounts, especially when making investments.

The employee can act as the fund manager and will have much more investment options to choose form.

This plan offers a brokerage window, through which your employer can allow you to invest part or all of your 401k plan as you desire.

However, some transitions are prohibited on a Self-Directed plan, the employer cannot invest in things such as rugs, automobiles, decoration and more.

And this type of account also has restrictions for the people you can do business with.

To qualify for a Self Directed plan you meet to meet some requirements:

  • In case you are a business owner, you need to be the sole owner and have no employees other than your spouse;
  • In case it is a partnership, you should have no employers but self-employed partners and their spouses;
  • You need to have received taxable compensation such as salary or wages as an individual, during the current financial year.


Safe Harbor 401(k) plan

In this version of the 401k plan, the plan owner’s employer’s contributions are not forfeitable. They are fully vested.

However, in a Safe Harbor plan the employer’s contributions cannot be higher than the employee’s contributions.

If your employer wants to, he can contribute up to 50 percent of the elective deferral contribution that you made in excess of 3 percent of your salary.

But, the employer can’t contribute with more than 5 percent of the employee’s salary.

Important to note, the Safe Harbor plan is not subject to the Actual deferral percentage test and the Actual contribution percentage test.

Tiered Profit Sharing 401(k) plan

This plan better fits those business that are making profit and have less than 50 employers.

The employees are rewarded by being classified in groups. They are classified by the roles performed by each group and their salaries.

The owner then decides the profit share for each group based on the contribution of each one to the business’s success.

This plan benefits employees and allows the employer to objectively manage the profit sharing cost.

Simple 401(k) plan

This plan is better for the business owners who have 100 employees or less that are compensated each with a minimum of 5000$.

The employer and the employee investments are both fully-vested.

But the employer must make:

  • A contribution of up to 3% of each employee’s salary.

Or:

  • A non-elective contribution of 2% of each eligible employee’s salary.

This plan is also not subject to the Actual deferral percentage test and the Actual contribution percentage test.

401(k) for Small Businesses

The plan for Small Business is a fairly young plan, dedicated to employers to offer competitive benefits for their employees.

This plan is more appropriate for companies with more than 20 employees. The fees vary by plan.

The employees have tax-deferred growth potential and pre-tax contributions. Also, the employers have tax-deductible contributions.

Many small company owners don’t offer 401k plans because the process is laborious or because this kind of thing is too expensive.

But the difficulty of offering a 401k plan for your employees can be minimized by contacting companies who offer more automated options for 401k plans.

As for the cost, nowadays it is possible to offer a 401k plans at affordable prices.

In addition, the tax deduction incentive benefits should not be overlooked, they really can help a business on the long run.

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

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