There are plenty of retirement plan options out there, but you need to educate yourself about all the particulars. There is nothing more sad than a retirement plan that is not maxed to its potential, left by a neglectful cubicle worker to wither and not fund a healthy retirement. That is a very sad development. That means that you have a cubicle worker that needs to spend more time thinking about their future.
The art of saving for retirement means that you need to make real strides in being a hardcore saver. You need to set a budget and stick to it with fanatical devotion. And you need to find retirement accounts that will be a real boon to your efforts. That is where the 401K comes in.
This post will answer commonly asked questions about the 401k, you can also check out 401k.com, and how it works.
What is a 401K plan?
A 401K plan is a retirement account that is sponsored and managed by your employer. You need to have a job in order to access an actual 401K plan. You can save a portion of your pretax earnings to the account and your employer has the option to match. You don’t pay taxes on the money until your withdraw from your account, most likely at a certain age or when you retire.
Can I get a 401K plan without a day job?
No, 401K plans are only available through companies. There is no free floating 401K that you can access.
What is the maximum 401K contribution?
For right now, the max contribution is $18,000. The IRS could change that at some point in the future, but that is all you can put away per year.
What does the 401 in 401K stand for?
The 401 represents subsection 401 in the IRS tax code. That is where the basics of the 401K are explained and the origin is demystified.
What happens to my 401K if I leave my job?
Good question. You can perform an act called a rollover to move your funds from your 401K to a 401K at your new job, or you can drop your money into a new retirement account, unaffiliated with an employer. If you take out the funds as a distribution, you have 60 days to roll them into a new retirement plan, or it will be taxed as ordinary income and a 10% penalty will apply. The best way to avoid that situation is to do a direct rollover from plan to plan.
What is automatic enrollment?
These days, companies are allowed to automatically enroll their eligible employees into a 401K, and give the employees the option to opt-out. This is great for low-information employees, because they automatically start saving for a very important part of their lives. Employers can opt employees into a 401K once a year, forcing the employees to choose short term gain if they do not value their golden years. Employers can also choose to automatically increase the contribution to the plan.