How does the 401(k) retirement plan work?
After having worked for so many years and reaching the 401(k) retirement stage, the most desirable is to have sufficient financial resources to meet the basic needs of the age or to maintain the same standard of living as in the work stage.
It is therefore good that from the beginning of your working life you plan and take advantage of the different retirement plans available, and one of them is the plan known as 401 (k).
This plan is one of the most used and is offered only by employers for the purpose of encouraging savings and promoting financial security for the 401(k) retirement of workers.
The plan is to make contributions to an account, which at the same time will be deducted from your pre-tax salary, which will allow you to reduce your tax base and consequently pay less taxes. There are also plans where you can make contributions after taxes.
The money contributed is then invested in one or several investment funds that you must choose according to your financial objectives, as there are different levels of risk and benefit.
The good news is that you can always make changes to your investment options.
As I mentioned earlier, you can only participate in a 401 (k) plan if your employer offers it. Some employers allow their workers to enroll in the plan immediately, while others apply a waiting period; That is, employees can begin to make contributions after having fulfilled a certain period of time at work.
The Department of Internal Revenue or IRS determines the maximum amount you can contribute in the year, for 2011 the limit is $ 16,500; And if your age exceeds 50 years, you can make compensatory contributions above the maximum amount, or up to $ 5,500 for 2011.
At the time of registration, you must indicate what percentage of your salary you want to contribute per pay period. You should consider that there is a limit and the maximum percentage is determined by your employer.
One of the most attractive advantages of the plan is that most employers make contributions in parallel to the employee’s account, which can be less than or equal to the worker’s contributions, making the balance in the account increase faster.
Forms of investment
The way the 401 (k) plan money is invested determines its long-term growth. Therefore it is always advisable to change the strategy over time. If you are young, you may want to adopt a more aggressive strategy where most of the fund concentrates on stocks with a lot of growth potential, and then as you get closer to retirement age you switch to a more conservative strategy concentrating more liquid assets .
Change of employment
If you change jobs you can take any of the following options:
– Transfer the balance to the plan sponsored by your new employer
– Transfer the balance to an Individual 401(k) retirement Account (IRA)
– Maintain the same plan if your previous employer allows it
– Withdraw the balance in cash
Before deciding on the last option, however tempting it may be, you should consider the associated costs like taxes and the 10% penalty for early withdrawal of funds.
Withdrawal of funds
You can start withdrawing from the account without paying any penalty at the age of 59 ½ years, also if you are dismissed from the company or disabled and exceed 55 years. But you must begin to withdraw money after turning 70 ½ because it is determined by the laws that govern the 401 (k) plan. The minimum amount of distribution is determined by the IRS based on your life expectancy.
Many 401 (k) plans allow you to withdraw funds under certain conditions.