401K Debit Card
So, what exactly is the 401K Debit Card program? Well, it is just what it sounds like – a debit card that is tied into your 401k account.
The 401K Debit Card allows you to open a line of credit against the amount available in your 401K account. This will allow you to borrow against loan provisions of your 401K account. Yep, you can go shopping for that big screen HDTV and instead of using a credit card or money you have in the bank, you can swipe your 401K debit card and use those funds.
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Roth 401K Benefits
What benefit does a Roth 401K have over a traditional 401K? A Roth 401K combines the features of the traditional 401(k) with those of the Roth IRA. The Roth 401K is offered by employers like a regular 401K plan, but with a Roth IRA, your contributions are made with after-tax dollars.
Although you don’t get the tax deduction up front, meaning you pay the taxes on the money now, the account grows tax-free, and withdrawals taken during retirement aren’t subject to income tax. This can translate into tax savings as most people are in higher tax brackets as they get older. Also, you won’t pay taxes on the money provided you’re at least 59 1/2 and you’ve held the account for five years or more.
The Roth 401K concept was introduced with the Economic Growth and Tax Relief Reconciliation Act of 2001, which stipulated that employers could start offering these plans in 2006. So far, there is a relatively low amount of employers which offer the Roth 401K.
The Roth 401K will offer some advantages to high-income individuals who haven’t been able to contribute to a Roth IRA because of the income restrictions. The Roth IRA eligibility for 2008 phases out between $101,000 and $116,000 for single filers and $159,000 to $169,000 for those who are married and file jointly. There are no income stipulations for the Roth 401K.
Currently in 2008, the Roth 401K accounts are subject to the contribution limits of a regular 401K — $15,500 for 2008, or $20,500 for those 50 or older by the end of the year — allowing individuals to stock away thousands of dollars more in tax-free retirement income than they would through a Roth IRA. (In 2008, Roth IRA contributions are limited to $5,000 a year, or $6,000 for those 50 or older.)
401K Contribution Limits for 2008
The 2008 401K contribution limits are mostly unchanged from 2007 - except for the increase in the section 415 limit on total contributions which is discussed below. At the same time it is important to review the limits regularly and make sure you are within the guidelines - and if you haven’t started a 401K plan or you’ve been skimping on contributions, remember that this is probably one of the finest opportunities you have to improve your future financial security.
While thinking about being retired can be a pleasant and relaxing way to pass some time, actually doing something like planning for your retirement seems to be a thing that way too may of us avoid or just let slip by, often until it’s so late in our working life that building up retirement funds is a huge, extremely difficult and painful job. OK, so it isn’t a real fun topic. Ignoring it, however, is a very stupid move. We all need to face the unpleasant reality that without doing some serious planning and actually accumulating those funds starting now, we may have a truly miserable retirement. Since 401K contributions are pre-tax, and since the contribution limits are pretty generous, this is a chance to substantial improve your life after retirement.
The 2008 401K contribution limits for employee contributions is going to stay at $15,500. This is the “elective salary deferral” portion of the possible 401K limits. What you need to keep in mind is that your employer will also probably set a specific limit such as 10% of your salary. In that case, the actual limit will depend on your salary and will be the lesser (it’s always the lesser, isn’t it?) of 10% or $15,500.
If you happen to be luck enough to work for an employer who will make a matching contribution, then it would be grossly stupid not to contribute to a 401K since it makes you an instant winner. Generally the employer will match on a less than dollar for dollar basis, say, 50 cents for each dollar, up to a percentage of your salary. So, as an example, if an employer will do a 50 cent match for up to 8 percent of your salary, you gain an instant pre-tax 4% put away for your salary when you contribute at least 8%. If your employer does do a match, then that’s a deal you want to be sure not to miss out on.
It was a surprise to many that the anticipated increase in the “catch up” contribution didn’t happen. Those over 50 have a chance to make an additional $5000 contribution next year that is in addition to any other contribution.
For the self-employed, there is an additional possibility. A profit sharing contribution of up to 25% of your eligible salary can go into your 401K. The exact amount depends on whether you are incorporated or unincorporated, but this is in addition to your salary deferral and any allowable catch up contribution.
Particularly for the self-employed, you need to be aware of the overall total 401K contribution limits which have increased to the lesser of 100% of salary or $46,000 for 2008. The catch up contribution is not included in this limit so under ideal circumstances and if you were over 50 years old, you could contribute $51,000 and still fall within the 401K limits.
For self-employed entrepreneurs, especially those over 50 with a substantial income this can represent not only a large tax savings but a very substantial addition to your retirement funds. With the control offered by a Solo 401K or Individual K plan, you also have maximum flexibility in choosing your own investments. Getting your planning in place now so that you can take the best possible advantage of the 2008 401K contribution limits is smart business and can greatly improve your quality of life when you do retire.
401K Pension Law
The 401K is considered a personal investment plan and enjoys the protection of pension laws. So, what exactly does this mean? Your 401K contributions are protected against garnishment from people you owe money to. There is one exception, however, and that is child support.
While the 401K plan has many advantages, there are a couple of disadvantages to consider. One disadvantage is that it is not easy to withdraw money prior to age 59 ½. There is a large penalty unless it is for education or emergency. Another disadvantage is that they are not insured by the Pension Benefit Guaranty Corporation.
The Pension Benefit Guaranty Corporation insures pension benefits for a lot of companies. Since the 401K plan is based on mutual funds, you are risking your money just like millions of others on the values of stocks and bonds.
Usually the employee is allowed to choose from a variety of mutual funds in which they can invest the contributions they make to their 401K plan. Typically you may choose from a low risk, medium risk or high risk and allocate a certain percentage to one or all of these funds. Typical investments in a plan include money market funds, bonds, stocks and treasuries. You are allowed to change your investment percentages and deductions at certain times of the year.
The 401K retirement plan is watched over by the government and, in fact, is named for the section of the Internal Revenue Code of 1978 where it is stated and is administered by the Employee Benefits Security Administration - a division of the Department of Labor. That being said, companies have full control over the funds and the investor has many choices on how to invest his retirement savings. It’s a good idea to take full advantage of this plan in order to accrue the most amount of money for your golden years.
Roth 401K for Beginners
Does your company offer a 401K plan? What about a Roth 401K? Chances are that if your company offers a 401K plan, you really haven’t looked into the details of what the 401K plan offers.
The 401K, either the traditional or Roth 401K, is a retirement plan that is offered to employees by most companies. The employee portion of the contribution is deducted from your paycheck, and sometimes the company will match your contribution up to a certain amount.
The amount that is matched can vary, but it is usually based upon a certain percent or dollar amount. In certain cases, company matching is not an option.
The great thing about contributing to a 401K plan is that the money is deducted from your paycheck prior to taxes being taken out. The exception to this is in the case of the Roth 401K, which the contribution is taken with after tax money. This is because the Roth 401K pays out with no taxes.
If you are a small business owner with only a limited handful of employees, this could be a great offer to your employees. While you don’t have to offer matching on contributions, you can still set up a 401K plan with numerous companies such as the Fidelity 401K plan. There are certain requirements however that have to be met in order to qualify for the 401K plans that are available. Each company can clarify those in more detail.
Although most employees think that the small deduction in each paycheck won’t amount to much in the 401K retirement plan, when this amount is added up over ones career, the compounding of interest can really make a substantial difference.
Most companies require a certain vesting period. This means that you must work a minimum amount of time in order to keep any company matching funds in your 401K. So, if your company has a 5 year vesting period and you leave before 5 years, then you can only take the contributions that you have made into the 401K up to that point.
While there are many aspects of the 401K plan, this is only the beginning. There can be some complicated aspects to many 401K plans, and with the requirements and contribution limits changing each year, it can become a burden to keep informed about your 401K.
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If you are new to a 401k, looking into getting a 401k, or just curious about how it might fit into your retirement package, then you have come to the right place.