401(k) is one type of a retirement savings plan. Its name comes from the number under which it is listed in the Internal Revenue Code. Its main characteristic is that it is sponsored by an employer who gets to participate in the investment.
401(k) is designed in a way that one can put a certain amount of money from their monthly paycheck prior to taxes being taken. With 401(k) one has many options when it comes to investing the money; it can be distributed over different types of investment in order to raise its value over the years.
Terms and restrictions
With the many benefits 401(k) offers, there are as some rules, limits and precautions. For example, one has to work for the given company for predetermined amount of time in order to be able to withdraw the money from the fund. The account is being overseen by an authorized person and the user gets regularly updates and help with papirology.
The most popular option is 3% match. What does that mean? It means that the employee puts 3% of your salary to the fund, and the company puts another 3%. In case he decides to put more, the company won’t follow him, but will remain on the 3% of the total amount.
This principle may vary among different companies, so one should be careful and try to get all the necessary information before signing anything.
Is there a maximum amount that can be put in 401(k)? Yes, there is, and it’s $15,500 (in 2014). For those over 49 years the amount is $21,000. That is the most one can put into the fund without company’s adding. Another limitation is that the overall amount put in the fund (by employee and the company) can not be higher than 100% of the salary, or $52,000 per year.
Types of 401(k)
There are two types of 401(k):
- Traditional 401(k) where the money is withdrawn before the taxes so taxable income is lower;
- Roth 401(k) where the money is withdrawn after the money has been taxed.
Traditional 401(k) is more often chosen, but Roth 401(k) is also in use.
Beneficiary is the person who would get the money in the case of one’s death. If the beneficiary is not manually elected and the fund user is married, the money will go to his/hers husband or wife.