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Retirement Place > Retirement Planning > Qualified Plans: Small Business, Group & Enterprise Retirement Accounts 

What is a 401(k)?

 

401(k) Employer Sponsored Retirement Savings Plans


     

 

 

 

What is a 401(k)?  Learn How to Roll Over Your 401k. 401(k) Rollover 401k Definition


According to the IRS, a 401(k) plan is a qualified plan that includes a feature allowing an employee to elect to have the employer contribute a portion of the employee’s wages to an individual account under the plan. Traditional 401(k)s are employer-provided accounts that serve as tax deferred retirement savings tools which allow employees to put money away for retirement on a pre-tax basis. Some companies offer a Roth 401(k) provision that allows a portion of an employee's money to be set aside on an after tax basis.

 

 

 

401(k) Quick Facts:

 

  • Who Can Contribute? Employee salary deferrals and/or Employer contributions. 
    • Elective salary deferrals made by employees are excluded from their taxable income (with the exception of designated Roth deferrals).
    • Employers can contribute to employees’ accounts through matching and profit sharing contributions.
  • How much can I contribute? Please see 401(k) contribution limits below.
  • Can I take a loan from my 401(k)? Participant Loans are permitted by the IRS, however, your 401(k) must specifically offer a loan provision in order for you to be able to take a loan.
    In-Service Withdrawals: Yes, however withdrawals may be subject to a 10% additional tax you are under age 59-1/2).
    • Distributions, including earnings, are includible in taxable income at retirement (with the exception of qualified distributions from designated Roth accounts).
    • The IRS imposes a 10% penalty for early withdrawals made prior to age 59 1/2 (without a qualifying exception).
  • Vesting: Employees are always 100% vested in their salary deferrals. Employer contributions may be vested on a graduated vesting schedule (up to six years).
  • Filing Requirements: Annual filing of Form 5500 is required.
  • Get a copy of the IRS 401(k) Resource Guide for specific details on 401(k) plans.    
  •   Compare Types of Small Business & Enterprise Retirement Plans

 

 

       Small Business Retirement - Employers: Starting a 401k Plan?‎

 

401(k) Plan Types:

By establishing several different types of Employer Sponsored Retirement Savings Plans under the classification of 401(k) plans, the IRS has made it easier for employers to set up retirement accounts and potentially make additional contributions for employees.

Click on this link to view a comparison of the different types of 401(k) plans along with other qualified business retirement plans available at Place Trade.  

 

401(k) Plan Types include:

  • Traditional 401(k) Plans
  • Qualified Automatic Enrollment Plans (QACA) Auto Enrollment 401k 
  • Safe Harbor 401(k) Plans 
  • SIMPLE 401(k) Plans

Additionally, One Participant 401(k) Plans are available for micro businesses and sole proprietors.

 

Please note that there are different rules for each type of 401(k) plan which must be followed in order for your plan to receive tax-favored status from the IRS.

 

             

 

 

 

This 401(k) information sounds complicated. What does this really mean to me?

 

The easy answer:

Your employer is offering you the opportunity to pay yourself first and making it as easy as possible for you to set money aside for retirement before you have the opportunity to spend it. Through these plans, you can direct your employer to send a specific portion of your pay check to your individual 401(k) account instead of paying all of your wages out in your regular pay check.

 

Why should I contribute to a 401(k)?

By taking the opportunity to pay yourself first it is likely that you will have a much easier time saving for retirement. Contributing to your retirement plan at work allows you to easily automate your largest bill (aka, your retirement), take advantage of dollar cost averaging and a potentially lower current tax bill. If you are lucky, your employer may even match your investments or offer profit sharing.

 

  • If you put money away in a Traditional 401(k), then you will be able to put money away on a "pre-tax basis" which means you will not have any taxes taken out of the money that you invest in your account (until you take the money out in retirement) and therefore you will have more money going to work for you today.
  • If you choose the Roth provision you can still set money aside for retirement, however, this money will be invested on an "after-tax basis" which means that you will pay taxes on these funds now and have less (due to taxes) to go to work for you now but you will not have to pay taxes on the money when you take it out in retirement. BTW, the Roth option is attractive for those who are not concerned with reducing current taxes and have five or more years left before they retire (or need to access the funds after retiring).

 

Why should I care about the match?

Think free money! In reality, this match is the tax-deferred portion of your salary. Your employer is offering the match as part of your total compensation package. Why would you turn it down? Would you turn down another raise?)

 

 

 

 

How do 401(k)s work? How does a 401k work? How to use a 401k

Employees may choose to have their employers contribute a set percentage of their pre-tax pay check to their 401(k) retirement account. After each pay period, your employer will transfer this percentage of your wages to your 401(k) account. These funds will automatically be invested in the asset classes that you have picked (usually from a list of alternatives provided by your employer) allowing you to dollar cost average your way to retirement. If you have a brokerage account option, your employer may transfer funds to your 401(k) brokerage account and you will be responsible for trading individual investments. Although not subject to income tax withholding, wages put into a 401(k) are subject to Social Security, Medicare, and Federal Unemployment taxes. The IRS and your specific 401(k) plan both set limits on the amount of money that an individual may elect to contribute to his or her 401(k) plan annually.

 

When you establish a 401(k) plan, you will need to:

  • Enroll in the plan using company specific documents. At this time you will: 
    • Tell your employer how much (what percent of your income) you would like to have set aside from each paycheck. (Try to increase this amount whenever you get a raise or sooner so that you may build your nest egg faster.)
    • Choose which investments are appropriate for your risk tolerance and retirement goals. (We can help you with this!)
    • Name beneficiaries

 

Once your account is set up:

  • Your employer will transfer your 401(k) funds to your retirement account.
  • Your funds will automatically purchase the specific investments choices that you have established. (Or will be transferred to your 401(k) brokerage account for future investments if you have this option.)

 

That is all that there is to it! Going forward it is important that you educate yourself as much as possible about investing, monitor your investments regularly and make prudent changes as necessary. (We can help you with this!)

 

 
 

 

 

What are the Advantages of choosing a 401(k)?

The advantages of keeping a portion of your retirement savings in a 401(k) plan rather than an IRA include the ability to borrow against your account, protect it from creditors under certain conditions, and make additional contributions to your account. Hardship withdrawals can be taken, although they are not treated as eligible rollover distributions. Distributions taken before the age of 59 ½ garner a 10% early distribution penalty. Different plans have different distribution requirements: some may provide for non-periodic distributions while others require you to take distributions annually.

 

More 401(k) Pros and Cons:

 


Flexible contribution requirements.


Higher contribution limits for employees than under IRA plans.


Plan considered to be a good choice if cash flow is an issue.


Participant loans and hardship withdrawals may be added.


Multiple retirement plans allowed in same calendar year.*


Can be a business of any size. (Usually more attractive to companies with 20+ employees.)

 



Administrative responsibilities and costs may be higher than under more basic arrangements.


Benefits testing required to ensure against discriminating in favor of highly compensated employees.


Testing can be complicated and pricey.


Additional withdrawal and loan flexibility benefits add an administrative burden for employers and expense to employees.


Need to file a Form 5500 annually.


 

 

*(You cannot have a SIMPLE IRA with any other retirement plan in the same calendar year.)

 

 

 

 

 

 

401(k) Type

 

 

 

Tax Rules1

 

 

 

Withdrawal Rules2

 

Traditional  

 

Contributions are made from each paycheck on a pre-tax basis (before taxes are taken out).

Your taxable income decreases by the amount that you contribute to the plan.

Upon withdrawal, you must pay income taxes on contributions and earnings.

You must begin taking required minimum distributions/withdrawals (RMD) by age 70 1/2.

 

 

You cannot withdraw your funds without incurring a 10% penalty for early withdrawal before either:

  • reaching the age 59 1/2, or 
  • you are retiring at age 55 or older.

 

Rule 72(t) May allow early distributions from your 401k (or IRA)

Roth  

 

Contributions are made on an after-tax basis.

There are no taxes paid upon withdrawal.

No minimum withdrawals are required. 

 

  You may withdraw money at any time so long as you have held the account for more than 5 years or more. 
Contribution Limits       

 

Employee:

  • Up to $18,000 in 2017.
  • Additional contributions can be made by participants age 50 or over.

Employer / Employee Combined:

  • Contributions per participant up to the lesser of 100% of compensation1 or $53,000 in 2016 and $54,000 for 2017.
  • Employer can deduct amounts that do not exceed 25% of aggregate compensation for all participants.

 

   

Employee:

  • Up to $18,000 in 2017.
  • Additional contributions can be made by participants age 50 or over.

Employer / Employee Combined:

  • Contributions per participant up to the lesser of 100% of compensation1 or $53,000 in 2016 and $54,000 for 2017.
  • Employer can deduct amounts that do not exceed 25% of aggregate compensation for all participants.

 

1,2For complete rules regarding 401(k)s, please visit www.irs.gov and speak to your tax and/or legal advisor.

Distribution requirements are dictated by the plan itself, and participants must either receive all benefits from the plan or begin receiving distributions by a specific beginning date (April 1st of the latter of the year that the participant retires or the year he or she turns 70 ½). Plan administrators are responsible for determining the minimum required distribution for each calendar year. However, if you find yourself switching employers before it is time to take advantage of your retirement plan’s benefits, you have several options. You can roll over your investments to an IRA, transfer them to your new employer’s 401(k) plan, or in some cases, you can leave them where they are.

 




What now? Deciding what to do with your old 401(k).


Rolling over to an IRA:

Transferring your retirement nest egg to a self-directed IRA allows you increased freedom when it comes to your investment choices. The ideal means of moving your 401(k) account’s contents into an IRA is a direct rollover rather than a cash transfer. Direct rollovers cut out the part of the transfer process in which your former employer takes a 20% tax withholding out of your account in case you choose not to reinvest your 401(k)’s contents in another retirement plan. (Side note: even if you are transferring over to your new employer’s 401(k) plan, a trustee-to-trustee transfer is the most effective way to move your money. Once your 401(k) plan provider writes you a check for the value of your account, you have only six months to complete the transfer, otherwise, that 20% tax withholding is extracted and lost forever.)

If you have company stock sitting in your 401(k) account with your old employer, deciding what to do with it when you transfer your 401(k) can be a challenge. If you rollover your account into a plain IRA, the entire value of your stock positions will be subject to income taxes. However, if you liquidate your holdings and transfer their value into a traditional savings account, you only pay income tax on the original purchase price of the stock, and any increase in the value of the security since its purchase date is subject to capital gains tax instead.

 

Cashing out or leaving your plan behind:
Cashing out of your 401(k) plan is perhaps the most ineffective (and tempting) of your options as you move on to a new employer. If you choose to cash out 100% of the contents of your retirement account becomes taxable, and you are also hit with as well as a 10% penalty for early withdrawal if you’re under 59 ½ years of age. Leaving your plan behind at your old employer can also be more expensive than you might believe: plan managers often charge annual fees of 2 or 3 percent just to hold your 401(k). Compare your 401(k) maintenance fees to those of a Rollover IRA to determine whether you are better off leaving your account where it is or updating its form and location. Self-directed IRAs have several advantages over 401(k)s, among which are explained investment options, generally lower fees, and more liberal withdrawal requirements. More information on IRAs can be found via our Retirement Planning page. Even if the fees are lower for an IRA other factors may make leaving your 401(k) where it is the most fiscally effectual decision. Just beware the dangers of leaving your money out of sight: do not forget to rebalance your portfolio periodically. Ensuring that your money is working for you in the most effective way possible is key to retirement success.

Joining your new employer's 401(k) plan:
Before you transfer to your new employer’s 401(k) plan, familiarize yourself with the investment options offered by the new plan. If your previous employer’s plan made a wide variety of mutual funds, bonds, and money market investments available, you may find the selection at your new company restrictive. Make sure you are up to date on the IRS’s contribution limits for 401(k)s as well and have ensured that their limits are compatible with your retirement planning strategy. Below are listed the contribution limits for 2016 and 2017. Limits will be indexed to inflation in 2017 and beyond.

 

 

 

How much can I contribute to my 401(k) plan?

 

 

 

 

 

 

Monetary Amount

 

 

 

Conditions

 

Participant Contribution  
  • Up to $18,000 in 2016
  • Up to $18,000 in 2017
 

Salary deferrals made into other qualified plans count against contribution limits

Participant Catch-up Contribution  
  • $6,000 in 2016
  • $6,000 in 2017
  Catch-up contributions can be made by participants age 50 and over.   

Maximum Contribution Amount Employer May Deduct

(Includes both Employer & Employee)

   

    25% of payroll

 

Payroll limited to:

  • $265,000 in 2016 
  • $270,000 in 2017

Maximum Allocation to Participant's Account

(Includes both Employer's & Employee's combined contribution) 

  The lesser of 100% of participant's total pay or $54,000 in 2016 and 2017.  

 

1,2For complete rules regarding 401(k)s, please visit www.irs.gov and speak to your tax and/or legal advisor.

Let our experienced retirement specialists get to know you and your retirement goals so that we can recommend the best investment options for your needs. 



Retirement plan specialists are available to help you assess your options and determine which retirement planning strategy best fits your needs.

 

   

Call us today at 919-719-7200 or 800-50-PLACE to get started!

   

Changing Jobs? What to Do With an Old 401(k) 

 

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What can you do with your 401(k) when you change jobs? Get straightforward advice about your retirement plan options so you can make smart decisions! How to Roll Over Your 401k. 401k roll over
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Make smart decisions with your old retirement plans today so that you can maximize your potential and get the most of your financial future!

 

Rollover your old 401(k) to a Place Trade Self-Directed IRA or Speak with one of our Experienced Financial Consultants to get Advice on your options or help develop a new financial plan.


Please be sure to check with your tax and/or legal advisor prior to making any contributions, withdrawals or other changes to your retirement account. Place Trade Financial, Inc. does not offer tax or legal advice. Information provided by Place Trade is for educational purposes and should not be considered as tax or legal advice under any circumstances.

 

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Learn more about retirement planning by visiting some of the links below:

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Find out how Place Trade can help you get the most out of your college planning by visiting some of the links below:


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529 College Savings Plans

UGMA/UTMA Accounts

 

 

 

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