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401 (k) Retirement Plan 401 (k) retirement plan is one of the most popular retirement plans. Under this plan, the worker is allowed to save for his future retirement, where income taxes on the employees earnings and saved money are deferred until withdrawal. The worker has an option to have a part of his wages to be paid directly into the 401 (k) account. There are few types of 401 (k) plan, namely, trustee-directed 401 (k) plans (which are not very popular) and participant-directed 401 (k) plans (Fried).
Participant-directed 401 (k) plan is the most popular choice. Under this plan the employee can choose from various investment options (for example, mutual funds, emphasizing money market investments, bonds, stocks, or both). Some companies also offer employees to purchase the companys stock. In its turn, the employee has right to re-allocate his or her money by selecting another investment at any time. Trustee-directed 401 (k) plans imply appointing trustees by the employer, who will then be making decisions concerning how the assets should be invested. It should be also mentioned that some assets in these plans are tax deferred.
Few years ago, before 2006 401 (k) plan contributions made by employee were on a pre-tax basis. To put it differently, no income tax was withheld on the income in the year when this amount was contributed. However, when the Roth provisions were enacted, the participants of the 401 (k) plan became able to allocate their contributions to a separate account (referred to as a Roth 401 (k) (Laffie, Starting in 2006: Roth 401 (k) s: Another Way to Save for Retirement). Qualified distributions from this account are free of tax; however, the contributions to this account are transferred on an after-tax basis, what means that the income tax is paid in the year the amount was contributed).
In such a way, 401 (k) plan is a retirement plan sponsored by the employer. The workers, or participants, can contribute their part of income into 401 (k) plan on a pre-tax basis. However, the maximum amount the employee can contribute is limited by the 401 (k) plan itself and by the federal government. If the employer decides to contribute tax-deferred matching amounts into the workers account, it is called a defined contribution plan (as the worker makes decision concerning the exact percentage of amount he or she wants to be contributed). After the retirement, distribution will be calculated in accordance with the overall amount the plan has grown. Therefore, to have sufficient amounts, it is very important to choose the investments thoroughly.
When the worker retires and begins taking distributions, the withdrawals are subject to taxes. It should be also noted that in case the amounts are withdrawn before the employee reaches 59 1 / 2 years, he will be subjected to an early withdrawal penalty (Gale and Pence). It is also very important to understand how the 401 (k) plan works. For example, in case business owner offers to his or her employees a 401 (k) plan, the employee can choose investment funds from the list of funds. The contribution will be deducted automatically and will be transferred to the employee's account with no taxes. The employee has an option to contribute a certain percentage of their wages, and some employers match the percentage of employee's contributions.
These contributions will be invested into the funds selected by the employee. In such a way, there are few differences between other retirement plans and 401 (k) plan. First of all, the employee tells exact amount (or percentage) he or she wants to be deducted from their wages and to be put into 401 (k) account. Usually the employee can put up to 15 percent on a monthly basis, however, the employer can limit that amount and reduce it at his discretion. The IRS also poses limitation to the employees annual contributions to $ 15, 000 (Weber). Also, unlike other retirement plans, in 401 (k) plan the money employee decides to contribute to the account comes out of wages before the taxes are applied.
In such a way, this type of retirement plan makes it obviously one of the most effective and the most painless ways to save for the employee's retirement. Thirdly, the employer may take part in it by matching a part of employee's contributions. The fourth difference is that the money is given to a third party, who is responsible for investing it in bonds, mutual funds, money market accounts, to mention a few. What is also very important, is that the money on 401 (k) plan are safe. The ERISA (Employment Retirement Income Security Act) that was enacted in 1974, foresees all necessary protection measures to protect the safety of employee's income. According to the ERISA of 1974, all deposits should be held in custodial accounts.
Due to these measures, the employee can be sure that his or her money is kept safe even in case his employer declares bankruptcy. The ERISA also obliges employers to provide employees easy access to account, to send employees regular account statements, and to ensure the plan is fair for all workers in the company. In such a way, the 401 (k) plan is the most effective retirement plan. Any business, whether it is a partnership, corporation, sole proprietorship or self-employed person are eligible for establishing 401 (k) plan (Brown).
Contributions to the plan can come from employee wages, from his or her employer or even both. What is more important, the employees age fifty and over have right to make catch-up contributions of $ 5, 000. What concerns employers, they can receive some tax benefits for contributions. In such a way, 401 (k) plans have proven to be very popular due to tax deferral, the employer matching contributions, the increased portability of 401 (k) plan, and the increased control due to self-direction of investments. Works Cited Brinkley, R. "The New Roth 401 (k): Save Now and Enjoy Tax-Free Withdrawals in Retirement. " Black Enterprise 36. 5 (2005): 50. Brown, C. "Solo 401 (k): Planning for Retirement?
Another Option for the Self-Employed. " Black Enterprise 37. 7 (2007): 46. Chester, D. , C. Davis and T. Thompson. "To Roth or Not to Roth: More Choice - and Individual Responsibility - in Retirement Investing Means Workers Need to Consider Their Options Carefully. " Journal of Accountancy 203. 2 (2007): 64. "Company Stock: How Much Is Too Much?" USA Today (Society for the Advancement of Education) 134. 2726 (2005): 8. Delaney, T. "Measuring Fund Returns. " Black Enterprise 37. 10 (2007): 46. "Employee Benefits News You Can Use: Here Are Some of the More Important Developments CPAs Need to Make Their Clients and Employers Aware of for 2006. " Journal of Accountancy 201. 4 (2006): 31. Fried, R. "Retiring Green: Social (k) Is the 401 (k) That Cares. " E 19. 1 (2008): 46.
Gale, W. and K. Pence. "Capital Gains, Stock Ownership Diffusion, and 401 (k) Plans. " Brookings Papers on Economic Activity 1 (2006): 198. Garmhausen, S. "To Give and Receive: How to Pass on 401 (k) Assets and Manage an Inheritance. " Black Enterprise 38. 3 (2007): 50. Henderson, W. and P.
Flower. "Rollover Roadblock: The IRS Puts a Snag in the Pension Protection Act's Provision Allowing Direct 401 (k) Rollovers to Non spouses. " The Advocate 981 (2007): 12. Houston, J. "Behind the Scenes of the Enron Trial: Creating the Decisive Moments. " American Criminal Law Review 44. 2 (2007): 197. L/, Altfest. "Personal Financial Planning: Origins, Developments and a Plan for Future Direction. " American Economist 48. 2 (2004): 53. Laffie, L. "Automatic Enrollment Rules for 401 (k) Plans: New Law Aims to Increase Employee Participation. " Journal of Accountancy 203. 2 (2007): 68... "Starting in 2006: Roth 401 (k) s: Another Way to Save for Retirement. " Journal of Accountancy 200. 6 (2005): 91. Oates, N. and C.
Brown. "Time to Rethink Your 401 (k) Plan? Pension Protection Act Allows Employers to Redesign Retirement Plans. " Journal of Accountancy 203. 5 (2007): 50. Summer, J. "Managed Accounts: A New Direction for 401 (k) Plans. " Journal of Accountancy 204. 2 (2007): 32... "Too Much of a Good Thing: How to Manage the Pitfalls of Company Stock in 401 (k) plans. " Journal of Accountancy 201. 4 (2006): 35. Scarinci, C. "IRAs and 401 (k) s: How to Pick the Best Plan; Help Your Firm - or Your Clients - Make the Right Choice. " Journal of Accountancy 199. 3 (2005): 37. Weber, K. "Dirty Little Secrets of 401 (k) Plan Fees. " Journal of Accountancy 203. 5 (2007): 34. "Your Bank's People: The Foundation of Your Success. " ABA Banking Journal 98. 3 (2006): 14.
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Research essay sample on 401 K Retirement Plan
