There are many ways to contribute to your retirement, but one of the best ways is through an employer-sponsored retirement plan. A few employer-sponsored retirement plan options include 401(k), 403(b), defined benefit pension, 457, SIMPLE (savings incentive match plan for employers) and SEP (simplified employee pension) plan. Where you work will determine which kind of retirement plan is offered to you. The most common employer-sponsored retirement plan is the 401(k), although 403(b) and 457 plans function similarly and have comparable limitations. Here are all the basics for my beginner’s guide to 401(k) plans!
What is a 401(k)?
A 401(k) plan is a type of retirement savings plan that is sponsored by an employer. This is different from IRAs, individual retirement plans), which are solely funded and operated by an individual. A 401(k) plan gets its name from the section of the tax code that governs it.
How do I get a 401(k) plan?
In order to participate in a 401(k) plan, you must first make sure you meet the vesting period, in other words you must work at your job for a certain amount of time (determined by the employer) before you are allowed to participate. Some employers allow their employees to start participating immediately, though. Participating in a 401(k) plan means contributing a portion of your paycheck to your retirement, which is then match at some percentage (again, determined by the employer) by your employer.
How does matching work?
Let’s use the example of a 5% match and assume you are making $100,000. This means that when you contribute 5% of your salary to your 401(k) plan, or $5,000 for the year, your employer will also contribute $5,000 to your 401(k) plan for you.
So, I can only contribute as much as my employer match is, then?
You are actually able to contribute as much as you want as long as you do not exceed the IRS limits. As of 2019, the IRS allows individuals to contribute up to $19,000 to their 401(k) (up from $18,500 in 2018). If you are 50 and over, you are permitted to contribute an additional $6,000. It’s important to note, however, that if your employer offers a 5% match, that means that they will only contribute up to 5% of your salary, even if you contribute more than that.
Are there any restrictions for accessing these funds?
You must wait until age 59 ½ to withdraw from your 401(k) without facing a penalty. If withdrawn before 59 ½, the early withdrawal penalty is 10%. You may also be required to take distributions at age 70 ½ unless you have not yet retired and even if you have not yet retired, some plans will still require you to start taking distributions from your 401(k).
Is there anything else I should know?
401(k) plans are a great resource for retirement funds. It is never too early or too late to start contributing and taking advantage of employer matching. If possible, try to max out your contributions each year. You will be extremely thankful you did by the time you retire!
