401k Retirement Contributions Tips Is Tough Unless You Know Where To Go

Posted on October 31, 2008
Filed Under Investments | Leave a Comment

Even though there’s a vast amount of information about 401k penalty hiding around the internet, unless you have some general understanding about the basics you can feel as lost as a helpless child! When it comes to your money and investments in your future, coming at this without all the facts can be, not only frustrating, but very serious and financially disastrous to you!

I’m hoping that I can help make this easier for you by showing some of the 401k plan basics for you here. I’m surely not an expert nor is this legal advice but I’ve uncovered these to be hard facts about general 401k information and they should at least arm you with enough knowledge to be able to carry on a conversation with someone in the investment or IRA business.

What is a 401k plan? Here Is A Quick Overview

Employer-sponsored retirement plans are generally grouped into two major categories: defined benefit (DB) and defined contribution (DC). In a DB plan, the employer promises to pay a defined amount to retirees who meet certain eligibility criteria. In other words, the plan defines the benefit to be received. In its most typical form, a DB plan pays a lifetime monthly benefit to retirees who fulfill specific age and service requirements. Benefits are usually linked to the amount of service and based on final average salary. Employees can reasonably rely on a known and expected benefit level; although protection against post-separation inflation is usually limited and/or uncertain. The plan sponsor may also provide an alternative lump-sum “cash-out” of the benefit entitlement. Until relatively recent times, the DB was the dominant form of employer-sponsored retirement program.

Here are some other really helpful “Things-To-Know” about 401k Plan and how 401k’s offer many benefits including these:

1. Typically the amount the owners and highly compensated individuals can contribute to a 401k is a function of the contributions of the other employers.
2. Generally, the vendor selected by the plan sponsor does all accounting, participant reporting, testing, and files 5500 reports with the IRS.
3. The employer can receive certain tax benefits for contributions.
4. Employers are not required nor obligated to make any contribution to the 401k, although employer may have some obligation to contribute if plan is deemed top heavy.

Although this is not very extensive 401k catch up contribution information, I hope these few tips prove to be helpful to you!

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