One Part of Your Retirement Income: a 401(k)

Everyone dreams of a stress free retirement, spending time with family and friends and participating in activities we like, enjoying life without worrying about the monetary aspect of retirement. A means to a financially secure future is the 401(k). This is a qualified retirement plan offered by most large corporate employers.

There are several advantages of a 401(k) qualified retirement plan. The employee’s contributions are pre-tax, lowering the income tax paid in the contribution year. The money grows untaxed, often for decades. The account owner controls how the funds will be invested. Employees who choose to start a 401(k) have the opportunity to contribute pre-tax money to an investment account. Most employers also offer some kind of a matching program, where a portion of the employee’s contribution is matched with employer funds. Usually the money is invested in a brokerage account or annuity. Most of the plans offer a choice of mutual funds. The account owner controls how the funds are invested. The money invested hopefully grows over the years, and neither the contributions nor the gains are taxed until withdrawn in retirement. At that time the money is taxed at the individual’s income tax rate.

Most people nowadays do not remain with one employer over their entire working life. The investment account remains under the administration of the employee’s company when the employee leaves, subject to certain rules and regulations. When the employee moves on, their 401(k) retirement plan is eligible for a 401(k) rollover. This means the account owner can take their account with them. An account owner does not want to withdraw all their 401(k) money when leaving for another employer. If all of the money is withdrawn it would be subject to taxes plus penalties if the individual is younger than 59 ½.

The person has other alternative for the 401(k) that will allow the money to remain in a retirement plan and continue growing. The best choice is what is called a 401(k) rollover. This means the individual can transfer the account to another 401(k) plan if his new employer offers one, and the employer’s plan accepts rollovers. A second available option is a 401(k) rollover to an IRA, an Individual Retirement Account. The advantage is that, as an individual moves through his work life and different employers, s/he can keep the number of accounts to a minimum. The 401(k)s can be consolidated into one IRA account.

Another advantage of an IRA is that there are more investment options. Most IRA brokerage accounts offer not only mutual funds, but also individual stocks and corporate bonds, CDs, Treasuries and other government agency instruments. Additional options for the 401(k) rollover are annuities offered by insurance companies.

There are several steps to a 401(k) rollover. The individual first opens an IRA account with a brokerage firm or insurance company. Usually the employer has their own 401(k) rollover form to fill out and return to the company’s human resource department, and then the form will be forwarded on to the company’s retirement plan administrator. The company’s retirement plan administrator will close out the account and transfer the funds to the new IRA. This may involve selling securities and transferring cash. Depending on where the money is coming from and where it is going, the mutual funds themselves can be transferred without being sold.

The best part of participation in a qualified retirement plan is that it forms an important income piece for one’s retirement. Retirement income nowadays involves several building blocks, such as Social Security, a pension, qualified retirement plans such as a 401(k), and additional savings.

It is never too late to start preparing for your retirement. Begin building your retirement wealth today with a qualified retirement plan sponsored by your employer.

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Posted in Retirement/Future