All About 401(k) Plans

By: Daniel Beckett

Retirement plans in the US include the popular 401(k) plan. The plan is a income tax deferred retirement fund that is funded by employees wages that go straight to the plan. Then, income tax is paid when the employee begins taking the money out of the plan after retirement. This is usually beneficial because the employee is often in a lower tax bracket after retirement than before.

One of the largest advantages of a 401(k) is that many employers will match funds deposited up to a certain amount. Usually, the amount an employer will contribute are either half or the full amount that they employee defers, up to a certain percentage of the employee's full wage.

Management

Management of the funds is usually handled in one of two ways. The most common management method is "participant-directed", where the employee can select from several different investment options, usually including a variety of stocks, bonds, money market investments, and the company's own stock. The less common method is "trustee-directed", where the employer appoints someone to decide who the plan will be managed.

Withdrawing the Funds

Despite the advantages of the 401(k) plan, there are some drawbacks as well. The chief disadvantage is that the money is usually tied up until the employee retires. Usually the employee can take the money early only if certain unusual conditions happen. And on top of that, there is a 10% tax penalty due for any money that is withdrawn before the normal retirement.

One option to get access to some of the money from a 401(k) plan early is to take out a loan from the plan. Some plans allow low interest loans from the plan under certain circumstances. Nevertheless is best if employees only contribute as much to the 401(k) as they can afford.

Moving the Funds Around

A 401(k) generally remains active, even if the employee leaves the company providing the account. When leaving their old employer, the participant can transfer their funds directly into an IRA (another form of retirement plan), or they can transfer the funds directly into their new employer's 401(k) plan, if their new employer offers one.

Article Source: http://www.retirementlivingarticledirectory.com

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