401k Articles Archive

Borrowing from Your 401k Plan - Advantages & Disadvantages - Basics of Borrowing, 4 Reasons to Borrow, Media & Myths on 401(k) Loans
(January 26th, 2009)
Financial advisors will never advise you to borrow money from your 401(k) retirement plan, afterall this is the nest egg that you will need when you stop working upon retirement. Other financial advisors will tell you borrowing a 401k loan from your own retirement account is more like an act of robbery! While it is encouraged not to ever borrow from your 401(k), there are advantages of doing so on the flip side; this is what we will explore in this article. Infact, according to a study conducted by the Employee Benefits Research Institute (EBRI), 18% of all 401(k) investors had outstanding loan balances at the end of 2006. Since 18% is a significant number, there must be some advantages to borrowing 401(k) loans that these people saw. Let's look at some advantages of borrowing 401k loans, and how not to dig a deep hole in your retirement savings. The diagram on the left describes 401(k) loans in a nutshell.. (Read Full)

Roth IRA Contribution Limits - Roth & Traditional IRA Contribution Deadlines, Limits, Important Dates to Note, Types of Compensation, Roth IRA & Traditional IRA Income Phaseout Ranges For Contributions
(November 7th, 2008)
The April 15th deadline for filing taxes to the IRS is also the deadline for investors to make their final Roth IRA & Traditional IRA contributions for that tax year. For instance, April 15th, 2009 will be the deadline for making contributions towards the 2008 tax year. After this date, any contributions made will be applied towards your 2009 tax year (for which the deadline will be April 15th, 2010). This differs from 401(k) plans that have December 31st, as the deadline for making 401(k) contributions. The IRS considers these deadlines to be 'do or die' cases where if investors miss the contribution deadlines, they forfeit their priviledge to make 401k or Roth IRA contributions for that tax year. If you have already filed your taxes before the April 15th deadline and have not made Roth IRA contributions, you can do so and file an amended tax return using Form 1040 (U.S. Individual Income Tax Return)

401(k) Early Withdrawal of Funds - Penalties, Exceptions, IRS Rules & Distribution Codes for Form 1099
(October 20th, 2008)
Most retirement investors know that if you withdraw funds from your 401(k), traditional IRA or 403(b) plan before the age of 59 and 1/2, you will be charged with a 10% early distribution penalty; however there are always exceptions to this rule. Also, this rule does not apply to Roth IRA, you can withdraw as much of what you have contributed to your Roth IRA as long as your plan has been in existence for atleast 5 years. Thus if you withdraw $5000 from your 401k plan at the age of 45, you will have to pay a $500 penalty, as well the $5000 will be included in your taxable income when you file taxes; a double whopper! Therefore, it is essential to know the rules & exceptions you have to work your way around this and borrow from your 401k plan without facing an early distribution penalty. You cannot however prevent the $5000 withdrawal from being included in your taxable income during tax time, unfortunately! (Read Full)

Retirement Saving Tips for 55 to 64 Year Olds
(October 20th, 2008)
Retirement saving can be started by persons from all ages, from 21 to 65. However, it becomes even more essential for seniors from the age 55 to 64 year olds to start thinking deeply towards their retirement as it will be pending in a decade or so. It is never too late to start saving for retirement, however from the age of 54, it becomes very important to have a retirement plan that will help you accomplish your goals and live the good life you have always dreamed of living. This article will help you decide if you are financially ready for retirement or if you have a projected shortfall and if you need to modify your 401k or Roth IRA contributions, saving strategies, goals or objectives to meet the shortfall. To calculate this, you will need to amalgamate the following information: (Read Full)

Maximum 401k Contribution & Catch Up Contribution Limits
(January 4th, 2010)
This article provides an overview of 2007 and 2008 401k contribution limits, catch up contributions, pre-tax and total contribution limits that apply as well as rules that highly compensated employees must follow. Before 2001, the maximum contribution limits on 401k retirement accounts was too low, not encouraging many employees to bother saving for retirement. However, after the Earnings to Lift Individuals and Empower Families (RELIEF) Act of 2001, the government has increased the maximum 401k contribution limits, as well as released the feature of Catch up contributions to allow those people 50 or over to save more money towards retirement, and thus "catch up." Starting 2006 and the years beyond, the maximum 401k contribution limits will be incremented each year to match with adjusted inflation... (Read Full)

Characteristics of the Roth IRA - Advantages/Disadvantages, Contribution Limits, Eligibility (Single, Joint & Married but Filing Separately Filers) and Income Limits
(July 13th, 2008)
The purpose of this article is to give you an in depth view of the Roth IRA with its advantages and disadvantages, income limits & eligibility. Named after its founder Senator William Roth of Delaware, the Roth IRA (Individual Retirement Account) was established in 1998 under the Public Law 105-34. While Traditional IRA may only be limited to where your corporation invests in, a Roth IRA gives you a wide array of investment choices; ranging from common stocks, mutual funds, commodities & futures, certificates of deposit as well as real estate). Here are the contribution limits of the Roth IRA. (Read Full)

Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) Becomes Law
If you read our article on advantages of Roth IRA, you know that tax-free growth of earnings, tax-free distributions and flexible withdrawal rules are just some of the great benefits of having a Roth IRA. Furthermore, the fact that no minimum required distributions are required once you turn 70 and 1/2 years old is another advantage. You might therefore have tried converting your Traditional IRA or SEP/Simple IRA to a Roth IRA but may not meet the modified adjusted gross limit (MAGI) rule. The MAGI rule states that if your adjusted gross income exceeds $100,000 a year for 2008, you will not qualify for Roth IRA conversion. Also, if your status is 'married but filing separately', you will not qualify for Roth IRA conversion. There is where the Tax Increase Prevention & Reconciliation Act of 2005 (TIPRA) comes into play. (Read Full)

Rules You Must Know to Convert a 401(k) to a Roth - IRS Notice 2008-30, Minimum Required Distributions on Inherited Roth IRAs & Restrictions for Beneficiaries
The benefits of owning a Roth IRA over a 401k are huge. Tax-free growth of retirement funds, ability to take out qualified distributions, and no forced minimum required distributions (MRDs) are just some of the benefits. But did you know that you do not have to have a 401k to convert to a Roth? You could convert your employer's retirement plan (whatever it may be) to a Roth via a Roth IRA conversion. This feature is enabled by the Pension Protection Act of 2006, before which no other plan other than a 401k was allowed to be converted to a Roth IRA. In this article, we will explore how you can convert your corporate retirement plan to a Roth and what rules/provisions you must follow in order to successfully do this. (Read Full)

401k Plans for a Small Business Owner
Contributing to a 401k plan has become ever more easier for small business owners as a result of new legislation brought about by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The EGTRRA has made 401k plans more flexible, easy and beneficial for a small business owner. First, a small business 401k is also known by its other names; Individual(K), Solo 401k, or Self Employed 401(k). Another common misrepresentation of small business 401k plans is that only sole proprietors can open them. This is incorrect; infact partnerships & corporations can also opt for a small business 401k provided they are owned by eligible plan participants. (Read Full)

8 Reasons to Never Borrow from Your 401k Retirement Plan
According to a study conducted by the Employee Benefit Research Institute in 2005, 20% of all 401k investors who were eligible for borrowing from their 401k plans (taking out 401k loans) did so. The average loan option exercised in 2004 was $6,946 which is about 1/2 of the average debt of households in America (excluding mortgage debt). The $6946 figure represents the following percentages of peoples' total retirement savings... (Read Full)

What is a 401k Rollover? - 20% Withholding Tax, IRA Rollovers, Divorce Proceedings
There are high chances that you will rollover your 401k retirement plan atleast once in your lifetime, if not multiple times. A 401k rollover is usually done when an employee leaves his current employer and moves to another company. The administration of the employee's 401k account will be moved from old employer to new employer. A 401k rollover can also be done when a participant is eligible to rollover his current traditional IRA into a Roth IRA or Roth 401k. We will explain how to do these 401k rollovers right in this next section... (Read Full)

A Close Look at 401k Retirement Plan - How It Works, Contributions, Withdrawals, Advantages/Disadvantages
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)... (Read Full)

Understanding the Roth IRA Retirement Plan - Introduction, Contribution Limits, Advantages/Disadvantages
Studies indicate that many people do not save for retirement because they do not understand all the 401k gibberish. First there's the traditional 401k, then there's the Roth 401k, annuities, ROTH IRA, Individual Retirement Accounts (IRAs) and your savings account at your local bank. Out of all these options, the Roth IRA has come out to be the best and the most popular option. Why? Because its tax-free growth and flexibility of making withdrawals cannot be competed against! Studiessuggest that compared to traditional 401k or 403b plans, a retiree who saves in a Roth IRA will have more savings upon retirement. Total Roth IRA assets in the United States totalled $178 billion as of December 2006 (Source: Investment Company Institute)...(Read Full)

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 (Read Full)

Introducing 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... (Read Full)

Simple IRA versus Simple 401k Plans - Eligibility, Contribution Limits, Further Readings
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.

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... (Read Full)

Understanding the Roth 401k - Introduction, New Rules, 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... (Read Full)

Tax Treatment of Roth IRA Distributions
The Roth IRA was created by the Taxpayer Relief Act of 1997, pioneered by the late Senator William V. Roth, Jr. and was made effective on January 1st, 1998. Before 1998, investors who wanted to contribute towards an IRA would either make a deductible or non-deductible contribution to a Traditional IRA. Distributions taken from a traditional IRA were taxed as normal income, and early withdrawals before the age of 59 and a 1/2 were subject to a 10% early withdrawal penalty. The Roth IRA allows investors to take tax-free qualified distributions from their Roth IRAs without having to pay the 10% penalty. Here's how it works... (Read Full)

Tax Deductions and Credits on IRA (Individual Retirement Account) Contributions
The important benefits of contributing towards an IRA are the tax deductions against annual income, tax-free growth of earnings and the non-refundable tax credits. You want to maximize the returns you get from contributing to your IRA, therefore it is essential to know the rules & limits placed behind these priviledges we just mentioned... (Read Full)