401(k) Plan Facts-Tax Benefits, 401(k) Rollovers & Terminating the 401(k)-4 Options with Your 401(k) When Leaving Your Employer

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401(k) Plan Facts You Need to Be Aware Of

Powerpoint slides on a superior retirement planning strategy called Roth IRA on Roids which allows for tax-free distributions, tax-free growth, guaranteed principal and guarateed death benefits.As people head into their later years, their retirement planning often includes a 401(k) plan that is offered by their employer. The whole concept of the plan appears to be simple, but you should be aware that the 401(k) plan facts do differ from the basic premise of saving for retirement. When you begin a 401(k), a portion of your income is set aside and invested into the plan. This investment is what will help you earn money for retirement. However simple that may seem, you must be aware of all the facts relating to the plan so you can ensure it is the right choice for you.

Who Can Make Use of a 401(k)?

In order to be eligible for a 401(k) plan, you must be employed by a company that offers the plan to workers. If your company does not offer a plan, or if you do not like the way a 401(k) works, you may be better off opening an IRA retirement account instead. If you do choose to take part in a company offered plan, there are three steps you must follow. To begin, you will be required to fill out appropriate paperwork that will be provided to you by your employer. Then you should go to an orientation session if the company offers one. Otherwise, make sure to read any material that is provided. The material will explain the rules of the 401(k). This will include investment choices, which will vary depending on the provider. Make sure you gain as much knowledge about the plan as possible before making a commitment to the plan.

After these two steps are completed, you will then have to decide how much of your income you wish to contribute to the plan. Many companies will match your contributions. This is an important factor. If your company offers a 100% match, then a 401(k) plan would be a great choice for you. After selecting the amount, you will need to choose what investments to use. Many plans will give you different choices, including stocks, bonds and mutual funds. Keep in mind that you have the right to stop contributions at any time. You simply have to notify your employer of your decision.

Tax Benefits Related to a 401(k)

There are two different types of plans available, a traditional 401(k) and a Roth 401(k). Each of these has different tax advantages. Traditional plans will provide two benefits, which are the ability to make contributions before taxes and the ability to later invest that money into an account that is tax deferred. Traditional plans use money from your pay check before taxes are taken out. This type of plan will reduce your taxable income.

Roth 401(k) plans are the opposite, and do not allow any contributions that are pre-taxed. This means that your income will not change, regardless of what you contribute to the Roth 401(k). The benefit of this is that when you reach the age to withdraw from the plan, the money will be available tax-free. Many people are opting for a Roth plan because it will provide them with tax-free retirement income in later years. While this is an attractive benefit, the majority of people are still investing in traditional plans.

401(k) Rollover and Terminating a 401(k) Plan

You are allowed to take the savings in your 401(k) when you leave your current job. There are four options you will have when doing so. First, you can choose to leave it as it is. Some employers will not allow this, so make sure to find out if this option is available. Second, you can use a rollover 401(k). This allows you the ability to transfer your current savings into a new plan offered by your new employer. Keep in mind you may incur some fees if the investment options are different. Third, you can use a rollover IRA and any stock broker will accept a 401k rollover money plan. This is similar to 401(k) plan rollovers. The main difference is that the money is transferred into an IRA retirement account instead of another 401(k) plan. Fourth, you can cash out the plan. This is a last resort because it will no longer allow you to save for retirement. You will also have to pay taxes on the entire amount, as well as an early withdrawal penalty fee if you are cashing out before reaching the age of retirement.

Rocco Beatrice, CPA, MST (Master of Science in Taxation), MBA (Master of Business Administration), BSBA (Management/Accounting), CWPP (Certified Wealth Preservation Planner), CMMB (Certified Mortgage Broker), CAPP (Certified Asset Protection Planner), Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an asset protection, award-winning trust, estate planning and tax expert.

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