The retirement process in the US can be done through a retirement savings plan called 401k Plan. To access this attractive scheme of investment and savings accounts, it is essential to have a current employment relationship.
Contributions are made bipartitely between the employer and the worker to a specific savings account. You can invest the capital generated to produce income by using it in the different financial instruments allowed by law.
The balance generated from the defined contribution of the retirement savings plan is determined by the contributions you have made to the plan and the return on investments.
Features of the 401K Plan
The 401k plan retirement savings plan allows you, as a worker, to invest and save a portion of your salary before taxes are collected.
The employer makes a contribution similar to that contributed by the worker; For example, if a worker allocated 5% of his monthly income, the employer would be obliged to pay 2% to 3% of the worker’s salary.
The supervision of said savings fund will be carried out by an authorized administrator, who must keep the worker informed of the updates of his savings plan and the returns that it generates.
The types of investment of the generated capital are the following:
- Mutual investment funds: These are monetary contributions used in different investment values.
- Shares: Their return is variable, depending on results.
- Bonds: With them, you get interest for the money invested.
Unlike a pension plan, these types of savings plans are defined distribution plans that give workers the possibility of being able to contribute to their own retirement fund through voluntary contributions that are reflected immediately upon deposit.
As an employee, you have the freedom to decide how much of your salary you are going to allocate to the savings plan, as well as the type of investment you want for your account.
Although these types of voluntary contributions are not mandatory for workers, the IRS sets certain limits. For 2020, the maximum contribution a worker could make was $19,500, with an additional $6,500 if he was over 50.
Another advantage of this type of investment for retirement is that they are not subject to individual federal income tax returns, since this contribution is not classified as salary. Your personal contribution can never exceed the income you generate in a year.
The retirement savings plan does not provide for the possibility of being able to make withdrawals from the account before the age of 59 and a half; however, there are some circumstances in which a worker may qualify for a hardship distribution.
Some of the criteria used for you to make a distribution from a retirement plan are those that have to do with major medical or funeral expenses. To determine the existence of this need and the amount needed to satisfy it, the plan must specify the rules that apply.
Making withdrawals from the pension fund for retirement can result in a penalty or fine for withdrawal, which is equivalent to 10% of the withdrawal, a penalty that will also be applied to the IRS when filing the tax return.
Employer dismissal or change
In the event that you stop working for the employer with which you had the savings plan, your fund may be transferred to an individual retirement account (IRA) or to a plan sponsored by the new employer.
The advantage of transferring the fund from your savings plan to an individual account is that you will be able to have greater control over how to invest the money between the different investment funds that exist.
Retiring with this type of savings plan will allow us to receive a continuous flow of fixed income after retirement arrives. The amount of said income will depend on the number of years worked, in relation to the last salary received before retiring.
The amount we receive at retirement will be the result of the additional contributions we have made and the success of the investments we have chosen. An employer can contribute the same amount that the worker allocates. You can even give the contributions with shares of the company.
You should view the 401(k) retirement savings plan as a long-term strategy that will help you save for retirement, and defer paying income taxes on the amounts invested in the plan until the time you withdraw. the money in the account.