Wouldn’t it be nice if you had enough money to spend the rest of your days in comfort? Most of us right now are working hard with these two things in mind: to fulfill our needs for the present and save up to secure for our future. Setting aside money in the bank isn’t a foolproof plan and in fact, it isn’t a wise plan at all. Typically what happens is that if you don’t use it up before retiring, you’ll find out soon after that any interest earned would just be like adding a glassful of water while opening up the floodgates! If you’re just a regular Joe who isn’t on his way to being a billionaire anytime soon, you’ll need to put your hard-earned cash somewhere where it can significantly grow to adequately fund your retirement. You’ll also want to place it somewhere secure but also have total control over it, because after all, it is your money, you should decide how it should be invested.
Retirement savings accounts aren’t new. The most widely adopted retirement plan, the 401(k) has been around since the beginning of the 1980’s. Anything that has a number for a name looks pretty intimidating, but knowing how your retirement plan works is something you shouldn’t shy away from. We’re all headed down that road anyway so we might as well prepare ourselves to the hilt, so without further adieu, here are ten facts that you need to know about your 401(k), explained in layman’s terms.
10. The name 401(k) was taken from subsection 401(k) of the Internal Revenue Code, also known as Title 26 of the United States Code. It can be found under TITLE 26 > Subtitle A > CHAPTER 1 > Subchapter D > PART I > Subpart A > section 401 > paragraph k. If you REALLY wish to know what’s in it, visit:
9. The 401(k) is a retirement plan that is classified as a defined contribution plan. In a defined contribution plan, the amount of money you’ll get will depend on how much you put in your account and how well your chosen investment performs. You are qualified for a 401(k) plan only if your employer sponsors such plan.
8. People like to use the term 401(k) loosely, but did you know that there are 2 types of 401(k) plans? You have a choice between a Traditional 401(k) plan and a Roth 401(k) plan. Each plan has its own unique tax advantages which is largely dependent on your income and tax bracket.
7. A Traditional 401(k) plan allows you to make contributions to your plan before you are taxed. However, the money you withdraw from your plan when you retire will be taxed using then-current income tax rates.
6. You’ll have to pay regular taxes in a Roth 401(k) plan, but any retirement withdrawals will be tax free.
5. What are your options if you move on to a new employer, or if you wish to take control of your investment? This is where a “rollover” comes in. You have 3 options if you wish to continue with your retirement plan:
4. Don’t change anything. You won’t incur any fees if you leave your money in your current plan.
3. If you changing employer and you’d like to use the plan they are offering, use a Rollover 401(k). This will allow you to transfer your savings even if the new plan has a different investment scheme, but you may have to pay some fees.
2. If you wish to manage your funds independent of your employer, use a Rollover IRA. This will allow you to transfer your money into an Individual Retirement Account and give you control over it, but again, you may have to pay fees for moving the money.
1. What if you’re self-employed? Freelancers, individual practitioners, as well as a sole proprietor, a corporation or an LLC that doesn’t have any full time employees are perfect candidates for an Individual 401(k) plan, also called a Solo 401K.
Bonus fact! Solo 401K plans such as the Broad Financial Solo 401K, lets you decide how to invest your money and even allows you to borrow up to $50,000 from your plan.