Like death and taxes, retirement is certain (hopefully!) But with all the different types of plans that exist today it’s easy to feel lost and confused. Maybe you work for a company that offers a Profit Sharing or 401k Plan, but you have no idea how much to contribute or how to invest your money. Do they offer a Roth 401k?
Maybe you’re a small business owner looking to set up a retirement plan for yourself or the few employees you have working for you, but names like Keough and SEP sound completely foreign.
Maybe you’re part of the fortunate minority who still has an old-style pension plan. But you’re concerned about whether that pension money will be able to support you during retirement and you want to set up supplemental investments.
Or, maybe you’re an individual investor wanting to save for retirement but you can’t decide between a traditional IRA and a Roth IRA.
The truth is there are a lot of different types of plans. They all have different rules and advantages and disadvantages. So how do you keep up?
Right here. Feel free to access our SiteMap to browse through all the questions you need answers for.
What You Will Find On Our Site:
- the various types of plans and who they are designed for
- the types of investments offered with explanations on how they work
- determining the proper asset allocation for your investments
- uncovering hidden fees in your that may be draining your savings
- how to move your money without letting Uncle Sam touch it
- the history and evolution of retirement plans
All About 401k Plans
401k plans are wonderful retirement tools. And that’s exactly what they are; tools. Its intent is to serve as one of the foundational legs of your years in retirement. Misuse your tools and you will likely jeopardize the entire structure of what you are building, which is, in this case, your retirement.
Like all retirement plans, these plans have many rules. They may seem intimidating, but they are not necessarily complicated. We want to uncover the mysteries and help you understand the basics of the plan so you get the most out of it without doing harm to your financial future.
Where does the name ‘401k’ come from?
The 401k plan-also known as a salary reduction plan-was introduced into law in 1978. The name 401k is simply a reference to the section of the Internal Revenue Code for which the rules appear. Nothing more, nothing less.
In fact, it is actually called a CODA, or cash or deferred arrangement. But as the plan gained popularity among employers and employees throughout the 1980’s, somehow the name 401k took hold and soon it was a common word.
How is it different from a pension plan?
Retirement plans can generally be segregated into two main categories: Defined Contributions (DC) plans and Defined Benefit (DB) plans.
The term defined benefit applies to the old style pension plans that a handful of lucky people still have today as a benefit from their employer.
You put no money of your own into the plan. But your employer makes contribution to a general account on your behalf over the course of your employment with them. When you retire, you will receive an amount based on an actuarial formula taking into consideration your years of service and compensation.
In other words, pension plans are called defined benefits because you are being guaranteed that you will receive a certain benefit (payment) when you retire from employment. They are defining a benefit.
401k plans, on the other hand, are defined contribution plans (see the hierarchy chart for DC plans below). This is because you are not guaranteed any specific dollar amount when you retire. The balance of your account depends on the amount of contributions you and/or your employer made to the plan along with how well your investments performed over the years you saved.
In other words, 401k plans are called defined contribution plans because you and your employer are specifying the amount you are contributing. You are defining a contribution.
I no longer work for the employer who holds my 401k. What can I do?
One of the great benefits of the 401k plan is its portability. Under many circumstances you can leave the account alone and not do anything. But if you decide not to leave it with your old employer, you can always move it to another qualified plan or IRA with no adverse tax consequences.
The worst thing you could do is cash it out and take the money. You’ll be responsible for paying Uncle Sam taxes and penalties on your hard-earned dough. This should be done only in extreme emergencies, and even then you should strongly consider other options first.