What is a 401(k) retirement savings plan?
401(k) is the section of the Internal Revenue Code that allows employees to participate in retirement savings plans sponsored by their employers. Contributions are tax-deferred, and interest and earnings accumulate on a tax-deferred basis. A 401(k) plan is an effective and powerful way to save for retirement.
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Why should I join a 401(k) plan?
There are five great reasons to contribute to a 401(k) plan:
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You can save for future financial needs through convenient payroll deduction.
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You can reduce your taxes, because federal and most state income taxes are deferred on your contributions until they are withdrawn.
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An array of excellent investment opportunities is available to meet your retirement planning objectives.
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Any interest and earnings on your 401(k) investments accumulate on a tax-deferred basis.
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You may be eligible for favorable tax treatment when you withdraw your money.
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How much can I contribute?
When you join your employer's 401(k) plan, you may be given a choice of how much to contribute, generally a percentage of your salary (subject to IRS limitations). Some plans may also provide a matching contribution made on your behalf by your employer, to help your savings grow even faster. And, if you're age 50 or older, your plan may allow you to make additional contributions to "catch-up" on retirement savings.
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Can I borrow from my account?
If your employer's 401(k) plan includes a loan provision, you can borrow from your account. The amount available for a 401(k) loan is subject to plan provisions and IRS restrictions. A 401(k) loan is not considered a taxable distribution as long as you make repayments according to the terms of the loan.
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Can I withdraw from my account?
Generally, you may take distributions when you terminate employment. Some 401(k) plans provide for in-service withdrawals without penalty for financial hardship, subject to plan provisions and IRS restrictions. A 10% IRS penalty may apply if you are under age 59 1/2 when you make your withdrawal. Otherwise, you can make tax penalty-free withdrawals when you retire or terminate your employment after age 55.
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What happens if I leave my current employer?
If you leave your current employer to retire or to make a career change, your employer's 401(k) plan may provide the following distribution options:
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Roll over your account to an IRA with Leggette or another financial institution
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Keep your money in your current employer's plan
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Elect a flexible distribution option
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Purchase an annuity
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Roll over to your new employer's eligible retirement plan
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Take a lump sum distribution
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