In today’s financially sophisticated world, it can be hard to stay on top of all of the investment vehicles available to you and to learn how they might fit into your overall plan for wealth accumulation and retirement savings. The financial experts at Synergy hope to streamline that process for you by providing educational information. In this post, we’ll address 401(k) plan basics.
What is a 401(k) plan?
401(k) plans are qualified retirement plans that allow employers to provide retirement income for employees. It is exempt from taxation, provided certain requirements are met.
401(k) plans allow employees to elect to have their employers make pre-tax contributions (e.g., salary deferrals) on the employees’ behalf in lieu of paying an equivalent amount in currently taxable cash wages. These plans are sometimes called “cash or deferred arrangements” or CODAs.
In addition to salary deferrals made by plan participants, employers can make matching contributions, as well as discretionary contributions. All of these contributions and the related investment earnings, or losses, on those contributions accumulate on a tax-deferred basis.
Self-employed individuals and working owners of closely-held corporations may find 401(k) plans especially attractive. Such individuals may benefit the most from the plan since they probably have the longest service in which to accumulate a benefit. They may also be allowed a greater contribution since their compensation is likely higher than that of other employees. This is especially true if the owner is the only participant, or when contributions to other participants are minimal in comparison to the owner’s.
401(k) Funding Sources
A 401(k) plan is funded from some or all of these sources:
– Employer Discretionary Contributions
– Employee Salary Deferrals
– Employer Matching Contributions
– Investment Earnings, or Losses
401(k) Contribution Limits for 2012
The amount an individual can contribute to an employer-sponsored retirement plan is the lesser of 100% of your salary OR $17,000 + $5,500 extra catch-up contributions for participants who are age 50 or older
In future posts, we’ll explain the different types of contributions, how vesting works and how withdrawals and loans can be made from the account. In the meantime, if you have any questions, please call us at Synergetic Finance. We’re happy to help you plan for the future!