10 Things to Know about Your Employer’s Retirement Plan
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- What it is?
Your employer’s retirement plan is a defined contribution plan designed to help you finance your retirement. Federal and sometimes state taxes on your contributions and investment earnings are deferred until you receive a distribution from the plan (typically at retirement).
- Why do they call it a 401(k)?
The 401(k) plan was born over 40 years ago, under Section 401(k) of the Internal Revenue Code, hence, 401(k).
- You decide
You decide how much to contribute and how to allocate your investments. This gives you the advantages of easy diversification – a well-balanced mix of investment choices, and dollar-cost averaging by making regular investments over time.
- It’s easy
You contribute your pre-tax dollars and lower your taxable income by making automatic payroll deductions. It’s a simple method of disciplined saving!
- Know your limits
In 2020 you can save up to $19,500 of your pre-tax dollars. If you are age 50 or older, you can save an additional $6,500.
- “Free” money
Many employers will match some of your contributions. This is free money and a great incentive to contribute to the plan.
- Vesting
Should your employer make a matching contribution; vesting refers to the percent of your employer contributions that you have the right to take with you when you leave the company.
- Borrowing
Some plans allow you to borrow a percentage of your account value. Keep in mind that you have to make regular payments plus interest on the loan.
- Early withdrawals
You may be able to take a lump-sum payment before you retire, generally for emergencies (hardships) only. You’ll pay a 10-percent penalty as well as federal and state income taxes. While this is good for emergency situations, your retirement plan is a retirement savings fund, not a rainy-day fund!
- Leaving the company
When you leave your job, you can rollover your retirement plan savings to an Individual Retirement Account, which can later be rolled over to a new employer’s retirement plan. This way, you stay on track for your retirement savings goals, without having to start over each time you change jobs.
