Benefits of Having a 401k

Benefits of Having a 401K
A 401k is a retirement savings plan an employer sets up for their eligible employees to save for future retirement. Small to large-sized companies offer 401k plans that permit workers to invest a specified percentage of their paychecks. Each individual plan has its own set of rules and restrictions regarding eligibility, 401k plan limits, withdrawals, and benefits.

History of 401K Retirement Plans
Prior to 401k retirement plans, companies and corporations offered pension funds to their employees. The Internal Revenue Service (IRS) signed into law a tax code which governs all 401ks in the 1980s as a supplement to pensions. Some unions and governmental agencies may still offer pension plans to its workers while most businesses elect 401k investment plans. Cost was the main factor in many companies switching from pensions to 401ks.

Types of 401K Investment Plans

• Traditional
• Safe Harbor
• Simple

A traditional 401k plan allows eligible employees to participate immediately upon employment or after being employed for a year. The employer has to perform two important tests required by IRS, Actual Deferral Percentage and Actual Contribution Percentage. These tests are mandatory to verify payroll deductions for plans are not favorable towards employees with higher salaries. It ensures the plan is nondiscriminatory to employees earning lower wages.

Safe Harbor 401k plan has similar characteristics as traditional 401ks. The difference is the safe harbor 401k must provide the employer with fully vested contributions when received. The contributions may include the employer’s matching, the employees’ contribution, or an employer contributing for an employee. Another difference with safe harbor is there is no mandatory testing for non-discriminating requirements.

A simple 401k is a retirement plan type most small businesses offer to their employees. The plan is cost efficient and requires companies to have no more than 100 employees. An employee must receive a minimum of $5000 in wages for a single calendar year. One restriction to this plan is that a participate may not receive contributions or accrued benefits under other plans of the employer.

By law under the IRS tax code, an employer can not restrict its employees from participating past one year of employment. Companies seeking a 401k plan to offer to their employees have various options through national 401k broker providers. A reliable plan is the Fidelity 401k which allows eligible employees to rollover, monitor and/or change contributions. Fidelity works with both the employers and workers to handle all transactions to maximize gains on investment plans.

How to Setup a 401k plan?
401k broker providers offer companies of all sizes the opportunity to set up a 401k plan. Fidelity, for an example, works with clients including employers and employees to set up a 401k account. Before selecting a provider, do some research to determine if your company is eligible and meet specific requirements. Various 401k requirement plans may require a company to earn a specific amount in revenue and have a required number of employees.

What is a 401k plan limits?
IRS has a limitation of the amount of contributions an employee may defer on an annual pretax basis. There is a limitation on 401k contributions to the account of an employee’s 401k plan. This includes the contributions made by the employer, the employee deferrals, and forfeited allocations. The deferral limits for traditional and safe harbor 401k plans is $19,000 for 2019 and $19,500 for 2020. For next year, the amount may increase for adjustments to cost of living.

Simple 401k investment plans have a limitation of $13,000 in 2019 and $13,500 in 2020 with the possibility of future adjustments. People 50 years old or older may contribute more than the required limit to catch-up on contributions. The amount in 2015 through 2019 for traditional and safe harbor is $6,000 and $6,500 in 2020. The simple 401k plan has a limitation of $3,000 in catch-up contributions from 2015 to 2020.

401K Benefits

• Employees control the amount of money they invest into a 401k plan.
• Employer pays the full matching amount or a percentage of contributed amount.
• Flexibility in decreasing and increasing contributions.
• Diversity of mutual funds including stocks, money market, and/or bonds.

Early 401k withdrawal is subject to taxes and penalties. It is one disadvantage of having a 401k plan. Most plans have protection even if a company goes out of business or experience a downturn economically. To avoid tax liabilities, participants can easily rollover their contributions with a broker provider into a Fidelity 401k.