Contributing to your 401(k)

A 401K is a popular savings plan that accumulates money towards retirement. Most consider a 401K to be a straightforward way to save for retirement, and it is ideal for individuals who do not want to make risky investments. These long term plans are generally available only through an employer. The employee must indicate how much money should be taken out of his paycheck; the money then gets invested in funds that accumulate value over time such as index based stock funds, growth funds, and money market funds. Generally, an employee can contribute no more than $16,000 annually to this fund.

401K plans, like any other financial plans, can face risks should they be put into risky investments; additionally, the Pension Benefit Corporation does not protect these funds. However, many choose to utilize the 401K because the employers often agree to match employee contributions. Should an employee contribute 5% of his salary every month to the plan, an employer may do the same, thus doubling the amount. 401K plans are also easy to understand and partake in and a person can choose different investment options, including those that are either safe or risky. Participants may also change both the percentage of their contributing salary but also the investments that the money is allocated.

Employees may also borrow money from their 401K plan. There are no restrictions with this money and these loans will not appear on credit reports; however, the employee may have to pay charges and fees, not to mention his losing the employer matching contributions when paying the loan.

Solo 401K
A Solo 401K is a retirement plan for business owners who are not only the sole owners of business but also do not have any staff presently. Employers who anticipate hiring staff in the future are also not eligible for the Solo 401K Plan. Should he have $100,000 in the plan, he can apply for a $50,000 loan. The employer may also deduct the Solo 401K contributions from his taxes. The tax savings are substantial as the Solo 401K investment will build on a tax-deferrable basis. One can contribute up to $40,000 a year and, beginning at age 50, an employer can also contribute a $2000 catch-up contribution.

This is a relatively new retirement plan and not offered by many financial establishments. Businesses that offer the service have annual maintenance fees and a one-time fee for setting up the account. There will be other charges if the financial business handles the employer’s accounts and bookkeeping as well. Additionally, a trustee is designated to hold the employer’s assets, though with careful planning it is possible for an individual to act as his own trustee. This requires meticulous planning with rules and guidelines clearly explaining how the plan will work.

401K Contribution Limits
401K contribution limits are set by an employer and the government. They determine how much the employee will contribute to his retirement plan. While these limits do not limit how much can be contributed, they limit some of the benefits such as tax deferments and employee contributions.