What You Need to Know About Your 401(k) Plan. pt.5

Employee retirement and financial compensation benefits come in all shapes and sizes to help employees save for retirement.?

These can be in the form of 401(k)’s, IRAs, Pensions, ESOPs, RSUs, and Stock Options to name a few.?

This week we are going to focus on the 401(k).

The 401(k) is a type of defined contribution plan which means that employees and employers contribute money into the employees individual account.?

The employee is often responsible for deciding how much to contribute into their account, up to a limit, and how these contributions are invested for their retirement.

In some 401(k) plans, employers may also contribute a flat amount or a percentage match based on how much the employee contributes up to a limit.

There are two primary types of contributions.?

The first is from pre-tax dollars. In this contribution, dollars are deducted from the employee’s pay prior to income tax assessment which may lower the employees net income at the end of the year.?

These dollars can grow over time through investment returns and the the gains are tax-deferred.?

At retirement, the withdrawals are often taxed at ordinary income tax rates.?

The second is from after-tax dollars. In this contribution, dollars are contributed from the employees pay after income tax assessment, but may grow tax-free in the account for retirement.?

These dollars can grow over time through investment returns and the withdrawals can be tax-free.

For both pre-tax and after-tax investments, there may be penalties on withdrawals if taken prior to age 59.5.

However, there are a few common situations where the employee may make deductions or transfers of their account balance without incurring taxes or penalties.

When moving to a new company, employees may request a rollover in which the current balance of their account including any vesting schedules can be transferred to a new employer 401(k) or an Individual Retirement Account (IRA).?

There may be tax implications of these rollovers if the account is transferred improperly and each 401(k) plan documentation will have the specific rules for your account.

Now you know some of the fundamentals of your workplace 401(k) benefits!

Wether you work from home, the office, or a little of both, follow along over the coming weeks as we explore your workplace benefits so you can take control of your future!

If you have questions about your benefits and would like answers now, you can schedule a time to meet with me over zoom. You can schedule directly on?my calendar.

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This article reflects my views and opinions only and does not reflect the views and opinions of New York Life. This article is not a solicitation to purchase anything. Investments involve risk. Consult your financial planner.

Thank you for reading and have an excellent day!