Employee Benefits - The 401(k)

Employee Benefits - The 401(k)

One of the best employee benefits available is the 401(k) which helps people save for retirement. Our grandparents, and even some parents, probably had pension plans. With a pension plan, a company would pay you a certain amount of money each year after you retire. Sadly, these have almost all gone away.

401(k) Basics

  1. What we have now are defined contribution plans, like 401(k)’s. These plans put the responsibility on the employee, who now has to save their own money. Employees will save a % of their paycheck straight into their retirement account.

  2. There is a limit of $19,000 per individual, but people 50 or older can contribute $25,000 a year to help them catch up on missed savings.

  3. You choose from a variety of investment options, typically based on risk. The options may say something like “Conservative”, “Aggressive” or “Combination”.

Employer contributions

Employers will often match what you contribute or at least a portion of it as an added benefit. The most common is for the company to contribute 3% of your salary if you contribute 3% of your salary. They will only contribute if you do, so make sure you take advantage of it! It’s FREE MONEY! One thing to keep in mind is the term “vesting”. This is the amount of time you are required to work at a company before you can actually keep their contributions to your account. If you quit your job before that time is up, you will lose all the money they contributed.

 

Distributions

 There are a few basic distributions that qualify without penalty, like you die, become disabled, or the company goes out of business. If none of those happen, you can start withdrawing when you hit 59.5 years old. If you take a non-qualified distribution, you will have to pay income tax AND a penalty. This should be your last straw. Don’t touch this money unless you REALLY need to.

You can sometimes get a loan from the 401(k) if you have to, but you will still have to pay it back with interest like any other loan.

“money tip of the week”

It’s tax season, so get your tax information ready! Make sure you get all the papers you need from any past employers, current employers, your school, or finance companies you have accounts with. The process will be so much easier if you have everything in one place.