A 401k is a retirement plan that is sponsored by an employer and allows employees and employers to make pre-tax contributions for their
retirement. 401k plans have become tremendously popular and plan providers have improved dramatically over the last few years and now offer
many more services such as increased investment selection, reduced administrative costs and efficient administration. At RCC We offer two
different 401k plans: Traditional 401k and Safe Harbor.
In 2012 a 401k participant can elect to defer up to 100% of their W-2 compensation up to a maximum of $17,000. 401k participants that will
become age 50 or older during the calendar year January 1-December 31 are permitted to make an additional "catch-up" contribution of $5,500.
The 2012 401k contribution limit is $22,500 for those age 50 or older. Employee contributions are 100% tax deductible and dividends and
investment earnings grow tax-deferred until they are withdrawn.
In general, withdrawals from a 401k before age 59 1/2 incur a 10% IRS penalty and are taxed as income. After age 59 1/2 an employee can
withdraw the money without penalty, but will pay income taxes. This is advantageous for many investors because they are able to make a
contribution to their retirement plan and receive a tax deduction during their working years while in a higher tax bracket, get many years of growth in
dividends and investment earnings without being taxed, and when retired and typically in a lower tax bracket, they withdraw the money as needed.
Some 401k plans have a loan provision which allows employees to take a loan. Tax free loans (up to 50% of the total 401k value with a $50,000
maximum) are permitted. Loans must be repaid according to the terms of the loan amortization schedule which is provided when a loan is initiated.
Failure to repay the loan according to these terms may result in a loan default causing income taxes as well as IRS penalties.
Generally the total loan balance is due within a short time period (60 or 90 days) upon voluntary or involuntary termination of service with an
employer. If the full remaining balance of the loan can't be repaid at that time, then the loan is considered defaulted which may cause taxes and IRS
401k Company Match Options
Employers are not required to make contributions on behalf of employees in a 401k plan. Although not required, many employers do make
contributions called a "company match." A common employer match is a 1 for 2 match up to a maximum of 3%. For example, if an employee
contributed 6% of their salary an employer would contribute 3% for the employee.
Frequently, there would be a vesting schedule on the company match. When there is a vesting schedule an employee would need to work for an
employer for a specified time period or else they may receive none or only a fraction of the company match. Of course, employee contributions do
not have a vesting schedule and are immediately 100% vested. A company match can reward loyal employees and frequently improves employee
retention and helps to attract new employees. Learn more about how an employee benefits from a corporate 401k.
a Hamlett Benefits Group Company