What You Should Know About 401(k)s

3 Facts Everyone Should Know

When it comes to retirement planning, everyone should know the basic information on how a 401(k) works. While there are many seminars and learning opportunities out there, it is unlikely an individual will learn the most important things they need to know in an hour-long training session. While this will not explore everything there is to know about 401(k)s, we have compiled the most important facts that really everyone should know about a 401(k) plan.

Contributing to Your 401(k)

It is common knowledge that during the working years of your life you will contribute to a 401(k) plan to begin getting ready for retirement. The question that most people have is how much they should be contributing, or rather, how much can they contribute. Workers were able to contribute up to $17,500 to their 401(k) plans in 2014, an amount which is adjusted annually to account for inflation. Workers who are 50 years of age or older can contribute an additional $5,500, for a total of $23,000.

Another question that is commonly come across is when individuals can begin contributing to a 401(k). This will depend on your employer and your 401(k) plan. Some plans allow you to begin contributing as soon as you start working for the company, while others will impose a waiting period of a few months to even one full year after starting work. Deposits into your 401(k) plan are most often made by withholding a percentage of money from your regular paycheck.

Deferring Income Tax

Traditional 401(k)s will allow individuals to defer having to pay income tax on the funds they contribute until they withdraw from the account. In order to find out how much this will save you, you can multiply your contributions by the tax rate. It is also possible to get a tax break at the state level – those who are considered low-income savers may also qualify for the saver’s tax credit. If you have additional questions about the income tax portion of your 401(k), speak with a financial planner.

Becoming “Vested” in the Plan

You will always get to keep your contributions to a 401(k) plan, but you will not get to keep your contributions made by your employer until you have become vested in the plan. Some employers offer their employees immediate vesting while other organizations will only allow an employee to become vested when they have been with the company for a certain period. This period is outlined clearly in virtually all employee benefits packages.

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