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401k Retirement Plan Savings

401k Retirement Plan Savings

There are many options to secure your retirement to enjoy your golden years after you have finished your career. A 401k retirement plan could be the best option for employees who spend much of their career working for a company who offers this type of benefit and especially those companies that match the contributions that the employee makes to the plan.

A 401k is a savings plan that eligible employees can contribute pre-taxed income into for retirement purposes. The savings are not reported as earnings on their individual federal tax forms, but they are subject to FICA, FUTA, and Medicare taxes. The money contributed to the 401k is invested and when the money is withdrawal, taxes are paid at that point.

A traditional 401k retirement plan works on the pre-tax principle, but within the last 10 years a different type of retirement plan was established called a Roth 401k where the contributed wages are taxed and the income tax is withheld at that time. Employers can also contribute to the plan. There are certain vesting rules about how long the employee must remain employed before they can qualify for the employer portion of the 401k.

Other rules to the traditional 401k include the non-discrimination policy. These rules sets out to maintain equality in employer matching contributions. The employer is required to perform tests once a year, called the Actual Deferral Percentage and Actual Contribution Percentage tests to prove there is no discrimination in deference to employees who earn more money.

There are many types of 401k plans other than the traditional 401k. The safe harbour 401k and the SIMPLE 401k plan. There are limits to the amount that can be contributed each year. The Internal Revenue Service updates this information on its website as relevant.

While a 401k is intended for retirement savings, when an employee withdraws funds from the 401k for whatever reason before the age of 59 1/2, there are penalties such as an excise tax at ten percent of the total amount. There are plans that allow employees to "borrow" against their 401k money. The money is repaid it is paid back with interest within a 5 year period.

The term 401k refers to the United States Internal Revenue Code section 401, but the term has broad understanding across the globe, as many countries have adopted the same type of alternate pension plan and some even refer to it as 401k.
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