401k Articles

Understand 401k Hardship Withdrawals

The Internal Revenue Service (IRS) allows 401k investors to take out 401k hardship withdrawals in the form of loans only if these 6 criteria are met:

i) the withdrawal is due to an immediate and important financial need
ii) the withdrawal must be necessary to satisfy that need
iii) You have no other way to fulfill that need or no other sources of money
iv) the withdrawal should not exceed the total amount needed by you
v) You cannot contribute to your 401k plan for up to 6 months after your withdrawal date
vi) You must have first received all non-taxable distributions or loans available under your 401k

401k Hardship withdrawals are permitted by some large companies, but due to the high costs of administering them, they may not be readily available in smaller companies. Check with your Human Resources department to see if 401k hardship withdrawals are permitted in your 401k program.… Read More »

Understanding the Roth 401k – Comparisons with Traditional 401k

Introduced in January 2006 under a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001, the Roth 401k is different from the traditional 401k plan because contributions are made after-tax (meaning after tax has been deducted off your pay). The Roth 401k is very similar to the Roth IRA; investors receive no tax deduction on annual contributions, but any withdrawals or proceeds will not be subject to tax either. Investors who own 403b plans are also eligible to contribute to Roth 401k. The government was more than happy to introduce this new piece of legislation because it means investors will pay more tax now, rather than making salary deferral contributions as in the case of traditional 401k plans.

The Roth 401k works inversely with a traditional IRA. With a traditional IRA, an investor receives current tax deduction after making contributions. Instead of this money going to the IRS now, it will stay with the investor and he can invest it in stocks/bonds/mutual funds or real estate.… Read More »

Simple 401k Retirement Plans – Advantages/Disadvantages, Eligibility, Deadlines

A Simple 401k plan is less well known than its counterparts Simple IRA and a traditional 401k but actually combines the best of benefits provided by both plans into 1 single plan, the Simple 401k. In this article, we explore some of the features provided by Simple 401k plans and advantages/disadvantages.

Advantages of Simple 401k Plans

i) No Testing – Traditional 401k plans require intensive testing to make sure the plan works in compliance with regulatory requirements set out by law. Such testing must be done by 401k professionals and can be very costly. On the other hand, Simple 401k plans do not require such testing and can be very appealing to small business owners who do not have the capital to expense to all the heavy testing that traditional 401k plans require.

ii) Borrow Loans – Simple 401k plans make it easier to borrow loans from one’s 401k and pay it back in the form of principal and interest payments.… Read More »

Simple IRA vs. Simple 401k Plans – Eligibility and Contribution Limits

While there are many similarities between simple IRAs and Simple 401k plans, there are many differences as well. In this article, we compare and contract between Simple IRAs and Simple 401k plans.

Eligibility

i) Employers – For both the Simple 401k and Simple IRA plans, employers must have a maximum of 100 employees or less who receive at least $5000 in annual compensation. Also, employers cannot maintain any other retirement plan for their employees who are eligible for the Simple 401k other than the Simple 401k. The employers can however run another retirement plan for employees who do not qualify for making contributions into the Simple 401k.

By contrast, an employer who runs a Simple IRA for his employees is not permitted to run any other retirement program no matter what. Therefore if an employee does not qualify for making contributions to a Simple IRA while his employer only administers a Simple IRA, then too bad for that employee!… Read More »

A Close Look at 401k Retirement Plan – How It Works, Contributions, Withdrawals, Advantages/Disadvantages

What is a 401k Retirement Plan?

401k plan is a tax-deferred retirement savings plan that most large corporations and organizations have set up for their employees to help them save for their retirement. 401k plans originate from a family of defined contribution plans where both the employer and the employee pay a percentage of their pay to a savings plan. For example, if the employee saves 10% of his monthly gross income to a 401k savings plan, the employer might match this with a 5% contribution. Since both of these are “defined and fixed”, they are known as “defined contribution plans.” 401k derives its name from the Internal Revenue Code – section 401, paragraph (K).

How Do 401k Plans Work?

After 3-6 months of working for your current employer, you might be asked to join a company sponsored or administered 401k retirement plan. This plan works by you having to contribute a certain amount of money from your monthly pay before tax is deducted (your gross income).… Read More »