401k loan and taxes
A 401k Helps You Plan For Your Retirement
Understanding what is 401k and the benefits employees can accrue can go a long way towards helping them lead a comfortable retired life. 401k is a financial planning option available to employees in the US that helps them build up money for their retirement. The 401k plan is only available via an employer and the money is usually taken out of the paycheck of an employee each month. The employee has the choice of how much money he or she wants taken out of the paycheck each payday.
The money is generally invested in:
• Money market funds
• Growth funds
• Index based stock funds
The amount that is deducted is pretax.The contribution of the employee in general is about $16,000 per year. As 401k plan does not get protection from the ‘Pension Benefit Guarantee Corporation’ and the is an element of risk involved like any other similar investment plan. The money invested may or may not go as expected as it depends on where you invested. There is always a danger of losing money if invested unwisely.
The biggest benefit of 401k is what is known as ‘401k match’ whereby the employer will match a percentage or all of the employee’s 401k contribution. For example, if an employee decides to contribute around 15% of his salary towards the 401k plan, the employer can match this with the same 15% or less. While not all employers will match the employee’s contribution, it is estimated that around 80% do. This is taken as part of employee benefits and is a way to attract and retain good employees. One key advantage of the 401k plan is that it does not attract any income tax until the funds are taken out from the account.
Some of the benefits of 401 plan are – it is simple and easy to deal with; As there are different investment options available, one can choose the best plan with less risk involved; 401k plans are so flexible that employees are free to change their contribution as well as their plan of investment. So the employee can increase or decrease his contribution according to his financial commitments.
401k plan also gives employees a provision to borrow money in case of emergency and this will not show up in a credit history. One can use this money for medical emergencies, school fees, home repairs, repay mortgages or any other purpose. But the point is, the loan will attract some charges and during the period of repayment of loan, the employer’s contribution will cease.
The rules regarding the 401k match will be decided at the time of hiring an employee and it will immediately come into effect. If you are lucky enough to join a company that offers 401k match, have your contribution as bigger as you can from your salary so that same amount will be matched by your employer. It will have a great effect as the more you contribute towards the 401k match, the greater will be the amount you will receive at the time of your retirement.
The employee has the right to choose their own investment program. So, use this opportunity and get the help of a trusted financial adviser as to the best scheme to invest your hard earned money in. It is better that the financial adviser has no links to your company, so that he will be impartial in his advice. Some companies could have standard places where they will invest, which may not always be to the advantage of the employee. Safe and steady growth of funds is of prime importance. Hence, it is important to invest wisely in programs that will offer steady and not spectacular growth, which could often be a recipe for disaster.
Like any insurance policy, you must clearly mention who the nominee your 401k plan is in case of your untimely demise and there is still money in the account. The nominee’s name should be declared at the time the plan is started. Invariably the spouse will be the automatic beneficiary. Even if the couple is not together, the spouse still the beneficiary unless a waiver is signed. Children. Partners or a trust can also be the beneficiaries apart from the spouse. Though 401k is not 100 percent fool proof, it is very much a safe and steady investment plan for employees.
Article by David Livingston of EQuote, who is a specialist in everything life insurance. For more information on cheap life insurance rates and instant term life insurance quotes, visit his site today.
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