Retirement Plans

Traditional IRA | Roth IRA | Rollover IRA | 401(k) | 403(b)

401(k)

401(k)s are offered through your employer and the contributions you make come out of your paycheck before taxes. That means your taxable income is lower and your tax burden is decreased.

Plus, since the money is coming out of your paycheck before you get it, you'll never even see it to miss it!

Many 401(k) plans give employers the option of matching a portion of the amount you invest. For example: if you make $40,000 a year and contribute 5% to your 401(k) plan, your annual contribution would be $2,000. If your employer matches 3% of your annual income, that's an additional $1,200 going into your retirement savings. It's almost like free money!

Benefits of a 401(k)

• Employees and employers can make contributions to the plan on a pretax basis, and contributions and earnings grow tax deferred until withdrawn.
• Chances are, you'll probably be in a lower tax bracket when you retire than you are now, and you'll pay less in taxes on the money you're earning now.
• Contributing to a 401(k) is practically painless - the money is taken out of your paycheck before taxes, so you never even see it to miss it.
• A 401(k) plan gives you control over your retirement plan by letting you choose from a variety of investments that may match your goals.

Contribution Limits

The maximum pre-tax amount an employee can contribute to a 401(k) plan is $14,000 in 2005. Employee contributions and optional profit sharing and matching contributions cannot exceed the lesser of 100% of an employee's compensation or $42,000.

Vesting

Vesting, or ownership of the account balance, is determined by the source of the money:

• Contributions that you make are always 100% vested, meaning that you always own all of the money you invest in your 401(k).
• Contributions that your employer makes may follow a schedule where the vesting percentage increases every year you work for the employer, for as many as seven years, until you own 100% of the account balance.
• Your employer chooses the vesting schedule that applies to your plan.

Taking Distributions

You can begin taking normal distributions from a 401(k) plan at age 59?. If you take a distribution before age 59?, you may be subject to a 10% penalty.

Remember, though, that you must begin taking distributions by April 1st of the year after you reach age 70? or retire, whichever is later. These distributions are commonly referred to as required minimum distributions (RMDs).

After that, you must take distributions annually by December 31. If you don't take the RMDs on time, the IRS will assess you a penalty of 50% of the amount that should have been withdrawn.