Getting the most out of your 401k plan

“Hi, my name’s Jen and I’m 23 years old. I just joined my first job as a software programmer. During my hiring process, I was asked if I would like to sign up for my company’s 401K plan for employees. Unfortunately, I had no clue what a 401K plan meant, though I’ve heard about it before. Could you explain to me what a 401K plan actually is and how it works? It would be really helpful for me, as I need to let the people in HR know about my decision in a couple of days. Something tells me that I should sign up for it, however, I would like to know more about it before I do.”

Hi Jen! It’s good to hear from you and I must say that the question you have asked is not really an uncommon one here. Plus, it’s never too late to ask and have yourself informed about such things.

To begin with, a 401K plan is basically a retirement savings plan for American citizens. This savings plan is generally sponsored by an employer; however, you can sign up for one even if you are self-employed. A 401K plan helps you save a certain amount of money from your salary before tax deductions are made.

Also, apart from your own contributions to the 401K account, employers also make contributions. The amount can be equal to your contribution or less than that. However, a lot of employers do not contribute at all. To know if your employer contributes to your 401K plan, you must ask them beforehand. If they do contribute equally, then take advantage of the benefit by investing as much as possible into your 401K. However, there is a limit to how much you can invest. According to the latest revised rules, you can invest a maximum of $15,500. If you are over the age of 49, you can add another $5000 to it.

401K accounts are controlled by your employers, so if you ever need to withdraw money or roll it over into a different savings plan such as an IRA, you will have to get it done through your employer. The policy even applies to taking loans from your 401K account.

One more thing you need to know is that, if you ever intend to take out money from your 401K before retirement, which is before you reach the age of 59 ½, you will have to pay taxes and penalties. However, there are exceptions to this rule.

Also, there are two types of 401K investment plans. One is a traditional 401K, where you invest money prior to tax deductions. But, if you choose to withdraw before the age of 59 ½, you will have to pay a 10% penalty. The other option is a Roth 401K, where you invest after tax deductions. However, the advantage here is that, you can withdraw the money after five years without taxes or penalties.

There is lot more to 401K plans, especially with regard to early withdrawals, self-employment and other such aspects. To know all the details, you should consider visiting www.401keasy.com. The website has all the information you need to know about 401K plans and will help you make the right decision.

Getting the most out of your 401k plan

“Hi, I just, recently, quit my job for a new one . I had enrolled into a 401(k) plan with my previous employer and would like to open a separate one with my new employer. Is it possible? What do I need to know about it? How should I get started with the process?”

Travis Jones,West Palm Beach, FL 33401

Hi Travis. You will be pleased to know that you can have more than one 401(k) plans. Thankfully, the Internal Revenue Service (IRS) does not restrict or prevent anyone from having multiple 401(k) plans. However, there are some conditions to the benefit.

For starters, there are certain limits to your 401(k) contributions. As of 2012, the IRS permits you to deduct only up to a maximum of $17,000 from your chosen 401(k) plans. If you are 50 or older, then the limit is raised to $22,000. The rule is applicable on all your plans and not just specific ones. It means is that, if you are below the age of 50 and have two 401(k) plans, then you can contribute $10,000 to one plan and no more than $7000 to the other.

Similarly, the rule also affects your contribution for lower plan limits. If your 401(k) plan has a set lower limit in terms of contribution, then you cannot contribute more than the set limit. For example, if you have one 401 (k) with a contribution limit of $6000 and the other plan has a set limit of $7000, then your total contribution in this case will be limited to $13,000 and not $17,000.

However, you also need to be aware of the consequences of making excess contributions. If you end up making excess contributions and do not correct them, you will be asked to pay taxes twice on the surplus amount. You will have to pay tax while depositing money and also while taking distributions. For example, if you contribute an excess of $5000 in an year to your 401(k) plan, then you will have to include the exact amount as taxable income when you file your tax returns. The amount will also be taxed when you withdraw it for retirement as the excess contribution does not establish a basis in your 401(k) plan. So to avoid the unnecessary penalty, you must withdraw the excess amount before filing your taxes. Also, the 10 percent early withdrawal penalty does not apply to the correction of excess contributions.

There are quite a few benefits to owning multiple 401(k) plans. To know more about the topic, consider visiting websites such as www.401keasy.com. You’ll find all the information you need about 401 (k) plans on the website.