Understanding The 401k Retirement Plan
The following article is from a series of articles, videos and tips about personal finances …
The 401k retirement plan has taken the corporate world by storm since 1979, primarily because of it’s affordability to employers. While pensions often sucked companies dry, 401k providers charge a small monthly administration fee (usually around $100) and this will give employers and employees several different investment options. After entering into a contract, you allow a percentage of your income to be deducted and invested into a special account where it can accumulate interest over the years and profit with the economy. Sometimes employers agree to match your contributions and your final pay-out could be doubled by the time you receive it.
What makes the 401k retirement plan different from other pensions is its flexibility and the amount of control you are given over it. Some options include: What percentage or flat monthly rate do you want to contribute? Also, where do you want to invest? Your employer will provide you with a list of options and you can choose between stocks, mutual funds, bonds, money market investments, company stock or any combination of the aforementioned. You may also appoint a financial adviser to make the choice for you. As with anything in life, there are risks. If your company goes bankrupt, you may lose a huge portion of your retirement savings, especially if heavily invested in company stocks. You may decide to take a more active role in where your money gets invested because some annuities may be losers, while others are winners. Generally, it’s recommended to diversify where your money goes so you don’t “put all your eggs into one basket.”
Check with your company to see which 401k retirement plan you’re under. Either defined benefit or defined contribution. Under a defined benefit plan, your employer has control over the final pay-outs, which don’t fluctuate as markets do, but instead are based upon your salary history and years employed. With a defined contribution plan, you’ll have more control over how much you contribute and where it’s invested, but less guarantee on how much you will end up with when you retire.
When you leave an employer, generally your 401k retirement plan remains active for the rest of your life. If you don’t feel comfortable entrusting your savings to the care of your ex-employer, or if your company charges a fee for looking after your account, you may rollover 401 k benefits into an Individual Retirement Account. Look into the rollover 401 k if you’re switching employers too. You’re allowed to draw on your 401k retirement plan after age 59 1/2 and you will then pay taxes on what you take out. Most plans have a minimum distribution requirement you must abide by, meaning that once you reach age 70 1/2, you’ll have to start to withdraw some of your money, unless of course, you’re still working. The only plan that is exempt from the minimum distribution rules is the Roth IRA. You may want to consider taking a crash course in investing and take a more active role to ensure maximum returns.
For more information on 401k retirement plan options, consult with your employer, local banker or advisers at Fidelity Financial. Remember, the earlier you plan for your retirement, the better you will ensure a secure future.
For more information on money management matters, go here: Personal Finances
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