401 ¿Qué?
Your career has a great impact on your well being. It provides you with income, connects you with others, and, for most people, health insurance coverage. Another benefit comes in the form of a 401(k).
401(k) Basics
A 401(k) is an option for diverting your wages to a retirement account. It gets its name from where you find it in the Code of Laws of the United States (see “What’s in the 401(k) Name?”). A 401k is a shift from pension plans (plans paid for by the company) to the responsibility of retirement savings being paid for by the employee. These accounts are usually administered by a financial services company, and the employer makes the determination of which investments are chosen. The company also sets the parameters, such as: only full time employees can participate, or you become eligible after six months of employment, etc.
Why 401K
First off, your annual contribution limit to a 401k is $17,000. Whereas other retirement options like Traditional and Roth IRA’s, only allow up to $6000 per year. Money deferred to a 401k is not included in taxable income (Box 1) of your W-2*, and tax is postponed on earnings (interest, dividends, etc). Often companies will match a portion of what employees contribute as an incentive for participation in the plan (usually a percentage of their salary). For instance, if you make $65,000 per year and work for a company that offers a 2% match, they will “match” your contribution up to $1300**. Money in a 401k is protected from bankruptcy, and may qualify you for the “saver’s credit” (a credit applied on your tax return).
401K Sign Up
Human Resources (HR) is the part of the company that administers the retirement plans offered. Make an appointment to insure that the individual will have the time to go over the paperwork with you, and answer all your questions. They will require your name and social security number. You will also need to indicate how much you want deferred from each paycheck (a percentage or a set amount), and who will be the beneficiary (person who will inherit your 401k in the event of your death). It may take a few pay periods for HR to process your request. Check both your paycheck and W-2 for accuracy.
Getting Your Money
Distributions from a 401k are treated as ordinary income and are penalty-free after certain criteria are met. Generally you need to be age 59½ and have separated from the company that set up the account. Forced distributions begin at age 70 ½ unless you are still with the company. You also have access to this money if you become disabled.
Leaving The Company
When you leave the company ,you have to decide what to do with the money in your 401k. Some companies allow you to leave it in the account; others make you close the account within a certain time period. If you withdraw the money, you will owe 10% tax and may incur a penalty. A better option would be to transfer the balance to an account at your new company or “roll it over” to an account at a financial services firm. To do this, you have to open a Rollover IRA and have the money deposited directly (ask the financial services firm for guidance).
Final Notes
A 401k is a strong asset when securing your financial future. At the very least, invest up to your company’s matching funds. As with any decision governed by the Internal Revenue Code, consult a tax professional.
Good Luck.
* Contributions are subject to Social Security (Box 3) and Medicare (Box 5), and are reported in Box 12 – code D.
** A company match is not included in the $17000 annual limit imposed by the IRC.
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