Defined Contribution Plans: 401(k)'s

As defined contribution plans make up more and more of the retirement plan options, it is essential to understand them. Educate yourself with these resources.


What is a 401(k) Plan?
A 401(k) plans is a voluntary savings plan named for the section of the tax code that established it. Employees contribute a portion of their pre-tax salary, and employers may match some or all of their employees' contributions.

Don’t Spend Your 401(k) Money!
If you are leaving your job (either voluntarily or involuntarily), try not to use your retirement money. If you do, you will pay a stiff penalty and lose out on not only the tax deferral but years of compounding interest.

  • Usually your company will want you to take your money out of the plan if it is less than $5,000. The company is responsible for and must pay fees on your account balance for as long as your money remains in the plan.
  • If you have less than the $5,000, you can try to bring it to your new job if they have a plan or roll it over into an Individual Retirement Account (IRA). Your old company can make the check payable to the new plan or they can make it out to the Individual Retirement Account.
  • If you take the money yourself the company will have to withhold 20 percent for taxes.
  • Consider leaving your money at the old company if the plan has the same advantages of a regular mutual fund with the same or lower fees.
  • If your old company invests mostly in company stock then you should switch over to an Individual Retirement Account – it’s usually too risky to keep all your eggs in one basket.

 


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