How do I contribute to my retirement plan?

If you are participating in your retirement plan, your contribution is based upon the percentage you elect to have deducted out of each of your regular paychecks and deposited in the retirement. Money taken out of your check to fund the account is deducted on a pre-tax basis. The company won't report the money as income on your W-2, which will lower the taxes you must pay. In addition, money in the retirement will grow tax-deferred until you begin making withdrawals, usually after you attain the age 59 1/2. [Top]

Do I pay taxes on retirement plan contributions?

Retirement plan contributions, and any earnings on your contributions, aren't subject to income taxes until you withdraw the funds. However, contributions are subject to Social Security and Medicare (Federal Insurance Contribution Act, or FICA) and unemployment insurance (Federal Unemployment Tax Act, or FUTA) taxes. Participation in a retirement plan does not reduce your Social Security benefits.Saving on a pre-tax basis is beneficial as it allows you to exclude the contributed amounts from the aforementioned income taxes. In addition, the tax deferral offers the added benefit of compounding, which over the years will help you accumulate additional dollars towards your retirement. [Top]

How much may I contribute to my retirement plan each year?

The good news here is that, based on recent governmental legislation the amounts you may contribute to your retirement plan are on the rise. This will help you prepare towards meeting your retirement related savings goals.

Here are the factors to consider when deteriming your maximum contribtion limits:

In Year 2009, you may make pre-tax contributions up to $16,500 not to exceed the lesser of 100% of your net earned income or $49,000.

(The aforementioned percentage of pay limit stipulates that this is the maximum amount that can be accumulated in any of your tax-qualified defined contribution plans including retirement, thrift, profit-sharing, ESOP, and money purchase plans if applicable.)

Many companies give their workers an opportunity to "catch up" on retirement contributions late in the year. They allow employees to earmark as much as their entire salary for the remaining weeks of the year to their retirement – so long as their contributions don't exceed the annual limits set by the plan and by law. [Top]

May I make changes to my contribution amount during the plan year?

You may stop your salary deferral for retirement plan contributions anytime with advance notice. If your plan allows for monthly deferral changes, then you may request an increase/decrease with 30-day advance notice, which will be effective the first of the following month. However, it is important to note that your employer has the right to establish a policy as to whether employees may change the amount during the year, or whether an employee who has ceased contributing may resume making salary deferral contributions again in the same year. You may refer to your plan's Summary Plan Description (SPD) to verify your employer's plan design. [Top]

Can I roll a previous retirement account or other retirement savings into the plan I have now?

Yes, as long as your employer has not indicated otherwise in your company's plan. Effective January 1, 2002, retirement plan participants and IRA investors will be able to move their retirement plan assets between retirement plans in the public, private, education and nonprofit sectors as they move between employment in those sectors. Monies may be moved between (to and from) 401, 403(b) and governmental 457 plans as well as Traditional IRAs. Previous regulations did not permit the comingling assets unless is was from a like plan. [Top]

What is a matching contribution to a retirement plan?

Employers who make discreationary contributions to their employee's retirement accounts commonly do so on a "matching" basis. Matching contributions are allocated only to those participants who defer into the plan.

For example, for every $1 you contribute to your plan, the company might agree to add 25 or 50 cents. Most companies will stop matching once you have contributed 3 percent to 6 percent of your own salary to the plan.

As an example, say you earn $49,000 and your employer offers a 50 cent match for the first 6% of pay you contribute to the plan. That means that if you make a full 6% annual retirement contribution in the amount of $2,940, your employer will add an extra $1,470. You, of course, may contribute a higher percentage of your salary (within the allowed limits), but, in this example, your employer’s match would only apply to the first 6% you elect to defer.

To determine if your retirement plan offers a match you may refer to your Summary Plan Description, or ask your human resources or personnel department if matching contributions applies at your company. [Top]

What is a profit-sharing contribution to a retirement?

Some retirement plans have provisions that allow for a non-elective or "profit sharing" contribution from the employer, as well as the more common matching contributions that are based on the amounts contributed to the plan by employees. Profit-sharing contributions are allocated to the accounts of all the eligible employees, whether or not they defer any of their compensation to contribute to the plan. Matching contributions are allocated only to those participants who defer into the plan. The profit sharing contribution is based upon your employer's corporate profits for the year, and is normally made at the end of the calendar year or after your company's fiscal year end. Although this may be a required non-elective contribution, because it is based on your company's profits, your employer may use its discretion to determine the percentage that will be paid based on its profits. This amount may be deterimed to be 0% if your company has not expereinced a profitable year. [Top]

Do my employer's contributions go into the retirement plan at the same time as mine?

Your salary deferral contributions are deducted directly from each paycheck and deposited in your retirement account- regardless of whether you are paid on a weekly, biweekly or monthly basis. Employer matching contributions do not have to follow the same schedule. Your employer may put matching contributions into the plan along with employee salary deferral contributions or add the matching contribution monthly, quarterly or annually. Your employer may also offer an additional retirement profit sharing contribution. If applicable, typically the profit sharing "bonus" will be contributed in a lump sum after the end of the year. [Top]