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 If you're thinking about retiring someday - and you should - then you need to think about starting a 401k plan. If you're lucky enough to have one of these plans at work, then make sure you've signed up. Retirement is really not that far away - ask anyone. It sneaks up on you, so be prepared.
Participating in 401k Plans
Even if you're relatively new to the workplace, you should be thinking about participating in a 401k plan. At the extreme, let's say you just graduated from college and are planning to work until you're age 62. That's roughly 40 years in the workplace. For argument's sake, let's say that you think you'll live until age 82.
We'll that's 40 years of income that needs to last you another 20 years in retirement. You can almost do the math in your head - you can't wait until you're in the middle of your career to start contributing to your retirement plan. It's a pay me now, or pay me later, situation.
401k Guide
We think that we've put together a pretty significant number of publications that cover a number of topics as they relate to 401k plans. We've talked about topics such as 401k withdrawals, loans, rollovers, rules, and contributions. We've even given you a tool that you can download for free and use to run through some high level retirement planning scenarios. Overall, we think we've put together a pretty comprehensive guide to 401k plans.
401k Withdrawals
There is no doubt that a 401k plan is meant to be used for retirement purposes. So when most people talk about withdrawals, their talking about normal distributions taken after the age of 59 1/2. But did you know that there are 401k withdrawal exceptions? We got an article that explains all of the 401k withdrawals you can make without a penalty.
Hardship Withdrawals
In fact, we've even got an article dedicated to a specific type of distribution - a 401k hardship withdrawal. If you've never heard of a safe harbor withdrawal, and you want to borrow money from your 401k plan, then take a look at that publication.
401k Loans
Fortunately, the IRS does allow 401k plan participants to borrow money from their 401k savings accounts, in the form of a loan, and without any taxation penalties. But participants also need to be aware of the specific rules that apply to their company's 401k plan.
Generally, 401k loans are allowed under most plans to pay for things like college tuition, a home mortgage, medical expenses, and a buying a home for the first time. But borrowing against your 401k might preclude you from participating in your plan until the loan is repaid. It's always best to make an informed decision before taking out a loan - check with your plan's administrator.
401k Rollovers
The days of lifetime employment are over and moving from company-to-company is commonplace today. Most plans allow you to continue to manage your 401k after you've left, but some companies "freeze" your plan. That's why it's good to know about 401k rollovers and the rules you need to follow to avoid a tax penalty.
If your former employer can help you with a direct rollover, that helps you to steer clear of any problems. But if you're thinking about managing this process yourself, just be aware that there are some timing limits when a rollover payment to an individual occurs.
401k Rules
If you're an employer that is thinking about putting together a 401k plan for your employees, then we've even got an article that covers the 401k rules that apply to employers. The process is pretty simple and there are only four requirements, but documenting the plan is important, as is incorporating flexibility into your plan. We think that 401k's are the single most important retirement benefit you can offer your employees beyond a pension plan.
401k Contribution Limits
We've really got two different articles that cover the topic of 401k contribution limits. Both of these articles clearly explain the contribution rules and limits that apply to both employees and employers. They also discuss a special kind of contribution limit that affects employees age 50 and over - the 401k catch-up contribution. So even if you're starting your retirement plan late, the IRS has given you a chance to catch up with some pretty significant catch-up provisions for the tax years 2006, 2007 and 2008.
Retirement Planning Tools
If you're the type of person that likes to do some back-of-the-envelope calculations, then check out our article on investing for retirement. In that article we discuss retirement planning that goes beyond 401k plans, but more importantly we provide you with a retirement planning spreadsheet that you can download for free.
If you don't think it's important to start saving for retirement early in your career, then you really need to work with that spreadsheet. You'd be surprised at how much of the financial burden is lifted if you start planning early.
401k Calculators
If you'd like to run though some scenarios using more sophisticated calculations, take a close look at the retirement calculators we have to offer. You can use these calculators to figure out how much money you need in retirement and / or how much money you need to save each year to provide you with a comfortable level of retirement income.
401k Retirement Plans in the Future
As the baby boomers enter their retirement years, there will be a larger proportion of Americans that depend on retirement plans for their income. For about 10 years we really didn't see much progress in the contribution limits the government established for most qualified retirement plans. But all that changed about four years ago.
Now individuals that reach age 50 and over in a calendar year can make catch-up contributions to their 401k plans and to their Roth IRAs. In fact, the growing popularity of the Roth IRA is now starting to extend its reach into 401k plans in the form of a Roth 401k.
After January 1, 2006, many employees might be faced with a decision to start funding another type of retirement plan - Roth 401k plans. The Roth 401k borrows from the concept of the Roth IRA (after-tax contributions) in exchange for tax-free withdrawals at retirement.
We thought it would be nice to package up all of the information we offer on 401 plans into one place. But as we've mentioned in nearly every article, the flexibility of 401k plans make them complex to understand. Each employer has the right to use their discretion in setting up the plan for their employees. Fortunately, all plans have an administrator and they are the single best source of employer specific information. Stay informed by doing your research, but don't be afraid to ask questions of the experts at your company.
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