By Stephen J Butler
The writer, cofounder of a third-party pension management enterprise and public speaker, discusses how 401(k) plans paintings, how you can verify the standard of a plan, and the way to revamp it to be larger. Of most probably curiosity to corporation decision-makers and lively 401(k) plan contributors.
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Extra info for 401(k) today: designing, maintaining & maximizing your company's plan
Some may need to save just to have a financial cushion, if they work in a cyclical industry. For these people, the loan provision removes a psychological impediment to depositing money into what would otherwise be strictly a retirement plan. This barrier is why relatively few people use IRAs to the maximum degree. The loan provision works well because participants can focus on achieving a financial goal short of retirement itself. They use the plan to reach that interim goal, pay the loan back, and then go on to the next major financial accomplishment.
To minimize the hassle factor of loans, these plans remove one of the greatest attributes of the 401(k) plan, especially from the per- Page 17 spective of younger employees. The law, however, is very clear: Participants can borrow from their 401(k) plans for any reason. Any limitations are at the discretion of the plan sponsor when choosing the design of the plan. After participants first contribute to a plan, there is no waiting period before they can borrow from their accounts. But practically speaking there will not be enough money in the early months to justify a loan of any material amount.
If over age 59 1/2, the participant will pay regular taxes on any money taken from the plan, but no penalties. 2. Leave the funds with the former employer's 401(k) plan, if the funds total at least $5,000. 3. Roll over the funds into an IRA or into the new employer's 401(k) plan. In options two and three, the tax obligation is further deferred, and earnings continue to build with no annual tax obligation. With the portability of 401(k) plans and the flexibility to continue deferring taxes, the participant can enjoy tax-advantaged savings for long periods of time and accumulate a large pool of capital.
401(k) today: designing, maintaining & maximizing your company's plan by Stephen J Butler