Premier401(k)
Introduction – 401(k) plans were created so that employees could plan and save for retirement. After years of new IRS rulings and other governmental changes they are considered by many to be among the best options for this purpose. Considered a better option than pension plans, more employers now offer 401(k) (or a similar plan) for employees.
The benefit of a 401(k) plan goes beyond just tax-deferred. They reduce your taxable income, account funds can gain interest, plans are portable (if you leave your current employer the 401(k) remains accessible and may be moved to future employers), and many employers contribute to employees’ 401(k)s. Unlike pension plans if something happens to your employer (i.e. bankruptcy or closure) your funds are protected entirely from losses as a result of that event.
Although some groups cannot offer 401(k) plans many of them are able to offer similar options. For instance state and government employees offer a 457 plans; and public hospitals, educational organizations, and churches and non-profit organizations have 403(b) plans. Speak with your employer about the specific terms and differences of your plan, if any.
Types of 401(k) – There are several types of 401(k) plan an employer may choose from. Traditional, Safe Harbor, SIMPLE, and Roth 401(k)s each offer unique benefits.
- Traditional 401(k) – Contributions are pre-tax (must pay tax at time of eligible withdrawal). Your employer may contribute to the plan on your behalf, match your deferrals, or both. There is annual nondiscrimination testing to ensure highly compensated employees are not being favored.
- Safe Harbor 401(k) – Similar to the Traditional plan, however employers must contribute to all fully vested employees’ plans. Does not have as many rules binding it – including no requirement for annual nondiscrimination testing.
- SIMPLE 401(k) – Designed for small businesses. Similar to a Safe Harbor plan, but only available to businesses with fewer than 100 employees. You may not receive any other employer contributions with a SIMPLE 401(k) plan.
- Roth 401(k) – Contributions are post-tax. Eligible withdrawals not subject to tax.
401(k) Plan Restrictions – All of the plan types have specific rules that govern how they may and may not be used. Every account has an early withdrawal penalty (10% of the amount withdrawn) if funds are removed before the age of 59½, unless it qualifies as one the few exceptions to that penalty. They also allow for loans, which are considered non-taxable income, but must be repaid with after-tax dollars. After turning 70½ years old account holders must begin withdrawing funds or face a severe penalty of 50% the amount that should have been withdrawn (unless you are still working at the time).