What is a 401(k)?
A 401(k) is a type of retirement plot that allows employees to save and invest for their own retirement. Through a 401(k), you can authorize your employer to deduct a certain amount of money from your paycheck before taxes are calculated, and to invest it in the 401(k) plot. Your money is invested in investment options that you choose from the ones offered through your company’s plot. The federal government established the 401(k) in 1981 with special tax advantages, to encourage people to prepare for retirement. They get their catchy name from the section of the Internal Revenue Code which established them (you guessed it, section 401(k)).
Supervalu Star 401K Plot Tips:
401k plans offer many benefits including the following:
Any business, whether a C Corporation, S Corporation, partnership, sole proprietorship, self-employed can establish Plot.
The company sets the eligibility requirements, within certain guidelines, at the time the plot is established.
Employer can restrict individuals with less than 1 year service, union members, non US citizens, part-time workers, etc.,from being eligible for the plot.
Contributions to plot can come from voluntary employee salary reduction, from employer, or both.
Each individual employee can defer in 2008 up to $15,500 or 100% of compensation, whichever is less.
Participants age 50 and over can make additional “catch-up” contributions of $5,000.
Employees are immediately 100% vested with their own salary reduction tax deferred contributions.
Employee withdrawals before age 59 1/2 may be subject to 10% penalty.
Employees who retire any time during the calendar year in which they turn 55, or later, are not subject to the 10% penalty.
Employers can establish a vesting schedule, within certain guidelines, for the contribution the company makes to the 401k.
Employers are not required nor obligated to make any contribution to the 401k, although employer may have some obligation to contribute if plot is deemed top heavy.
Turnkey and Internet based plans are available.
Brilliant range of investment options available for the plot sponsor to offer within the plot.
The investment choices in most plans range from 8 to 20 options. The average plot has about 15.
401k plans may permit “self-directed investment accounts” and company stock buy within the plot.
Employee contributions to the plot are not subject to federal income taxes until a distribution from the plot is made. Any investment gains and earnings also delight in tax deferral until distribution.
This type of plot can permit loans and hardship withdrawals.
Participants can start, stop contribution during course of year, as determined by the company.
The employer can receive certain tax benefits for contributions.
Plans are subject to top heavy and discrimination testing.
Typically the amount the owners and highly compensated individuals can contribute to a 401k is a function of the contributions of the other employers.
401k plans can be subject to IRS 5500 filings.
Generally, the vendor selected by the plot sponsor does all accounting, participant reporting, testing, and files 5500 reports with the IRS.
401k plans have proven to be well loved with employees for several reasons. The tax deferral is obviously high on this list of reasons. Others include the increased portability of this plot, employer matching contributions, and the increased control associated with self-direction of investments.