How does the plan 401 (k) work?

Having worked for so many years and to reach retirement stage, it is most desirable to have sufficient financial resources to cover basic needs of their own age or to maintain the same standard of living in the working stage.

It is therefore good that from the beginning of your working life planifiques and take advantage of the different retirement plans available and one of them is the plan known as 401 (k).

This plan is one of the most used and is only offered by employers in order to encourage savings and promote financial security for retirement of workers.

The plan is to make contributions to an account, which in turn will be deducted from your salary before taxes, allowing you to reduce your taxable income and therefore pay less tax. There are also plans in which you can make after-tax contributions.

The money contributed is then invested in one or more funds that you choose according to your financial objectives, since there are different levels of risk and benefit.

As I mentioned earlier, you can only participate in a 401 (k) if your employer offers it. Some employers allow their workers to enroll in the plan immediately, while others apply a waiting period, or whether employees can start making contributions after serving a certain period of time at work.

The Internal Revenue Service or IRS determines the maximum amount you can contribute in the year, for 2011 the limit is $ 16,500, and if your age exceeds 50 years can make compensatory contributions above the maximum amount, or up $ 5.500 for 2011.

At the time of registration, you must indicate what percentage of your salary you want to contribute per pay period. You must consider that there is a limit and the maximum rate is determined by your employer.

One of the most attractive benefits of the plan is that most employers make matching contributions to the employee’s account, they can be less than or equal to the contributions of workers, making the balance in the account grow faster.

The way the money from 401 (k) is invested determines its growth in the long term. Therefore it is always advisable to change the strategy over time. If you are young, you might want to adopt a more aggressive strategy that most of the fund is concentrated in stocks with great potential for growth, and then as you go closer to retirement age you switch to a more conservative strategy concentrating more liquid assets .

If you change jobs you can take any of the following options

– Transfer the balance to your new employer-sponsored plan, – transfer the balance to an Individual Retirement Account (IRA) – Keeping the same plan if your former employer permits; – Remove the cash balance

Before deciding on the latter option, however tempting it may be, you should consider the associated costs like taxes and 10% penalty for early withdrawal of funds.

You can begin making withdrawals from the account without paying any penalty at the age of 59 ½ years, also if you are fired from the company or disabled and surpass the 55 years. But you must necessarily start withdrawing money after age 70½ because that determines the laws governing 401 (k). The minimum amount of distribution is determined by the IRS based on your life expectancy.

Many 401 (k) plans allow you to get funds by way of loans under certain conditions.