Tuesday, July 14, 2009

Hey, what is 401(k)?

Many of us are not simply aware about what 401(k) is? Today I will try to explain and clear doubts about what exactly 401(k) is. It can be regarded as one of the several retirement packages which took shape in 1978 and is defined as 401(a) and 401(k) in several IRS code sections. It offers a favorable tax treatment for both the employer and employee.

Let me tell you all that 401(k) is not some kind of investment rather it’s an account. The account has got limitations with $16,500 being the limit for 2009 and people above the age of 50 can contribute up to $22,000.

Check out the advantages which you can incur by opting for 401(k):

Your contributions are made with pre-taxed salary thereby reducing your income tax.
• All contributions are allowed to grow free of capital gains and income taxes.
• Some employers will match the employee contribution up to a certain percentage. For example, your employer allows you to contribute up to 10% of your salary; if they offered a 50% match and you made a 10% contribution, your company match could potentially add another 5% to your overall salary!
• You can dollar-cost average or create the habit of routinely contributing to your account no matter how the market is performing. By doing so, you buy more shares when the price is low and less shares when the price is high while reducing the overall volatility of your 401(k) portfolio.
• You have the protection of the ERISA laws, which prevents creditors and predators from raiding your retirement savings in the event you suffer financial challenges.
• And lastly, you can take it with you when you leave (and not until then)! You have options. You can take the money out. Or, you can roll it over into your new employer’s 401(k) program or your own Traditional IRA.

One thing you need to consider about 401(k) is that you cannot withdraw money until the age of 59 ½ and in case you withdraw before that you will have to pay 10% penalty besides federal and state taxes which you owe on the deferred amount withdraw.

Seems I have been able to make you a lil aware about the term called 401(k).

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