Frequently Asked 401k Questions
What is the need for a 401k Retirement Plan?
Retirement funds and pension plans have always been the best way to provide for yourself, as it has been a long time since the average American was able to survive on Social Security alone. There are advantages to paid pensions and other employee benefits, but many times they will be insufficient or unable to all American workers. Coupled with the projected further drop in Social Security that might normally supplement a traditional pension plan, this shows the need for a dependable, secure retirement plan capable of providing for people later in life. Personal savings, which normally might be sufficient to last years after retirement has dropped from 12% of the GDP in 1965 to a paltry 5% in 1995. Baby boomers, in a study by Merrill Lynch have been saving only a third of what is projected to be necessary for a lengthy retirement, made even longer recently by increasing life spans.
What are the advantages of a 401(k) plan over an IRA (Individual Retirement Account)?
Essentially, 401k Retirement Plans are a better choice than IRA's because the contribution to 401k's is so much greater. Under the IRA program, you are only allowed to add $2,000 annually. The limit imposed upon 401k's is $10,500. When one also considers the potential for matching funds from employers as well as profit sharing contributions, the number can rise to $25,000.
How do Matching Funds increase the value of a 401k investment?
As an incentive for workers to invest in a company's 401k program, employers will offer to match contributions to a personal account with a certain proportion of that contribution. If you contributed $200, and your employer had committed to adding 50% of whatever money you added, you would be put $300 into your account every time you received a paycheck, rather than only $200.
How does tax-deferral work for 401k Retirement Plans?
If you were to contribute to your 401k fund the way you would with any other pension plan, you would only be able to add as much money as you had available after you had paid your income tax on it. Tax-deferred funds like 401k's allow you to contribute from your paycheck with funds that have not been reduced by federal, state and local income tax. This allows you to accrue interest and grow your investment with much more money as a baseline. You will be paying income tax on any money you remove from the fund at any point.
How can I find out more?
- You can start by visiting our online Learning Center to review the basics of how a 401k rollover works and what it can do for you.
- Use our Contact an Agent form to request a rollover for your 401k plan.
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