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Welcome to 401k Central!
401k plans are wonderful retirement tools. And that's exactly what they are; tools. Its intent is to serve as one of the foundational legs of your years in retirement. Misuse your tools and you will likely jeopardize the entire structure of what you are building, which is, in this case, your retirement. Like all retirement plans, these plans have many rules. They may seem intimidating, but they are not necessarily complicated. We want to uncover the mysteries and help you understand the basics of the plan so you get the most out of it without doing harm to your financial future.
Use the links in the navigational guide below to find the answers to all your questions. We attempt to leave no stone unturned,
but if you have any questions not answered on this site, please feel free to
contact us.
All About 401k PlansWhere does the name '401k' come from?The 401k plan-also known as a salary reduction plan-was introduced into law in 1978. The name 401k is simply a reference to the section of the Internal Revenue Code for which the rules appear. Nothing more, nothing less.
In fact, it is actually called a CODA, or cash or deferred arrangement. But as the plan gained popularity among
employers and employees throughout the 1980's, somehow the name 401k took hold and soon it was a common word.
How is it different from a pension plan?Retirement plans can generally be segregated into two main categories: Defined Contributions (DC) plans and Defined Benefit (DB) plans. The term defined benefit applies to the old style pension plans that a handful of lucky people still have today as a benefit from their employer. You put no money of your own into the plan. But your employer makes contribution to a general account on your behalf over the course of your employment with them. When you retire, you will receive an amount based on an actuarial formula taking into consideration your years of service and compensation. In other words, pension plans are called defined benefits because you are being guaranteed that you will receive a certain benefit (payment) when you retire from employment. They are defining a benefit. 401k plans, on the other hand, are defined contribution plans (see the hierarchy chart for DC plans below). This is because you are not guaranteed any specific dollar amount when you retire. The balance of your account depends on the amount of contributions you and/or your employer made to the plan along with how well your investments performed over the years you saved. In other words, 401k plans are called defined contribution plans because you and your employer are specifying the amount you are contributing. You are defining a contribution.
Make sense?
I no longer work for the employer who holds my 401k. What can I do?One of the great benefits of the 401k plan is its portability. Under many circumstances you can leave the account alone and not do anything. But if you decide not to leave it with your old employer, you can always move it to another qualified plan or IRA with no adverse tax consequences. The worst thing you could do is cash it out and take the money. You'll be responsible for paying Uncle Sam taxes and penalties on your hard-earned dough. This should be done only in extreme emergencies, and even then you should strongly consider other options first. Don't hurt your financial future.
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