3 facts everyone should know

When it comes to retirement planning, everyone should know the basics of how a 401 (k) works. While there are many seminars and learning opportunities, it is unlikely that a person will learn the most important things they need to know in a one-hour training session. While this won’t explore everything there is to know about 401 (k), we’ve put together the most important facts everyone should really know about a 401 (k) plan.

Contributing to your 401 (k)

It is common knowledge that during the working years of your life you will contribute to a 401 (k) plan to begin preparing for retirement. The question most people have is how much should they contribute, or rather, how much may They contribute. Workers were able to contribute up to $ 17,500 to their 401 (k) plans in 2014, an amount that is adjusted annually to account for inflation. Workers who are 50 years of age or older can contribute an additional $ 5,500, for a total of $ 23,000.

Another question that often comes up is when people can start contributing to a 401 (k). This will depend on your employer and your 401 (k) plan. Some plans allow you to start contributing as soon as you start working for the company, while others will impose a waiting period of a few months to even a full year after starting work. Deposits to your 401 (k) plan are generally made by withholding a percentage of the money from your regular paycheck.

Income tax deferral

Traditional 401 (k) plans will allow individuals to defer paying income taxes on the funds they contribute until they are withdrawn from the account. To find out how much this will save you, you can multiply your contributions by the tax rate. It is also possible to obtain a tax exemption at the state level; those who consider themselves low-income savers may also qualify for the saver’s tax credit. If you have additional questions about the income tax portion of your 401 (k), speak with a financial planner.

Become “grandfathered” in the plan

You will always be able to keep your contributions to a 401 (k) plan, but you will not be able to keep contributions made by your employer until you have vested rights to the plan. Some employers offer their employees the immediate acquisition of rights, while other organizations will only allow an employee to obtain acquired rights when they have been with the company for a specified period. This period is clearly described in virtually all employee benefit packages.