The 401(k) plan might not be as popular as it used to be, but many companies still provide it. Your employer might have one. How familiar are you with it? Let’s begin by clearing some of the common misconceptions about it:
1. All Companies Should Provide a 401(k) Plan
No federal or state law demands a company, especially a small business, to offer a 401(k) plan to their employees. They don’t need to provide you with any retirement savings plan at all. It remains to be a benefit or an incentive.
2. Employers Should Match the Contribution of Their Employees
These plans work through matching the contributions of the employees, but how much the company puts up can depend on many factors. It might also not be equal to what you put into your account.
For example, some companies can give a fixed percentage of your salary. It doesn’t matter the amount you give. If you earn $58,000 a year, then your employer contributes $1,160. It can also be an exact match or a flexible percentage depending on your contribution.
In a Lockheed Martin 401(k) plan, for example, the company can contribute up to a 10% match. It’s one of the highest in the business. Note that this match can change over time. It can start with a fixed percentage and then gradually increase to a higher percentage later.
Some can also use it to reward performing employees. Companies might put up a higher percentage match for them as a way to keep them.
3. You Can Contribute Any Amount to Your Plan
This is only partly true. While you can choose to contribute as much as you can, the IRS places a cap on it. For 2019, the maximum amount you can put into your plan is $19,000.
If you’re already 50 years old and above, you can make a catch-up contribution. The maximum is $6,000. In other words, if you’re already nearing retirement, then your possible contribution can be up to $25,000. Your employer, meanwhile, should ensure that the combined contributions should not exceed $56,000.
4. IRAs Are The Same as 401(k) Plans
They are similar but not the same. IRA stands for individual retirement accounts, and these are voluntary savings plans you can open up regardless of your job or income status. (Bear in mind these accounts can also have qualifications.)
They can also differ in terms of taxation. In a 401(k) plan, your contributions are tax-free. When you make withdrawals, though, you need to declare an income tax. In Roth IRA, which is a type of IRA, you pay taxes on your contributions and none on the withdrawals.
Because of this, it is still essential to work with an investment advisor whether you have an IRA or a 401(k) plan. This is to maximize the growth of your money while finding ways to minimize your taxes.
The 401(k) plans remain one of the effective options to secure your retirement. Knowing more about them will also empower you as a plan holder. You can decide better where to put your money and how fast you want it to grow.