401k AdvantagesOnce you understand 401k advantages, you’ll probably be eager to set up your 401k retirement plan. Here are just a few ways a 401k plan benefits employers and their employees:
Why They Are Attractive to EmployeesMany elements of a 401k can be appealing to your employees. Different 401k plans may be attractive because:
- Traditional 401k plans defer pre-tax money from their paycheck, which reduces the employee’s total taxable income.
- If they have a 401k plan with a ROTH feature, employees can include some ROTH elective deferrals in their 401k.
- Employers may match deferrals, helping the employee further grow their retirement funds.
Why They Are Attractive to EmployersHow do employers benefit from 401k plans? Fortunately, the advantages are mutual. Employers who set up 401k plans for their employees enjoy tax advantages such as:
- Employers can deduct all 401k contributions from their federal tax returns.
- All elective deferrals and investment gains are tax-free.
- Administrative costs associated with operating the 401k plan and contribution to retirement plans are tax-deductible up to certain IRS limits.
401k RequirementsDepending on the retirement plan provisions, certain employees may be eligible for a 401(k) retirement plan. Some of the most commonly used 401k requirements include:
- Employees must be at least 21 years old.
- Employees must have been with the company for at least 12 months.
- Employees can join the plan on the first day of the quarter after working at the company for 12 months.
Restrictions Regarding Early WithdrawalsIt’s important to note most 401k plans do have certain restrictions regarding early withdrawals of funds. Employees will have to pay a penalty and pay taxes to access their contributions (or contributions made by the employer) before the age of 59½. The penalty fee is 10 percent of their total withdrawal.
Employees Who Leave a Company with a 401k PlanEmployees who are terminated from a company with a 401k plan can roll their vested account balance from their employer when they leave. Here are a few options for how to go about it:
- Keep the account balance in their former employer’s retirement plan and let it grow until retirement.
- Withdraw the money as a lump sum and pay any necessary taxes and penalties.
- Roll the money to an IRA or a qualified plan with a new employer.