What
is a 401(k) plan?
A
401(k) plan is a salary-deferral retirement plan. Employees
agree to put part of their salary into a special savings
and investment account. The 401(k) plan offers a variety
of mutual funds to money market accounts. Importantly,
the money you invest isn't counted as income when you
complete your annual tax return. For example, if you
earn $35,000 but put $5,000 into a 401(k), your taxable
income for the year would be only $30,000. Earnings
that accumulate in the account are not taxed until you
start making withdrawals, usually after you reach age
59 1/2. If you withdraw earlier, you'll have to pay
taxes on the money and a 10 percent premature distribution
penalty. [Top]
What
happens to the money I put into the 401(k) plan?
The
money you put into a 401(k) plan is invested according
to the choices you've made from a list of choices offered
by your employer. These choices typically include stock
and bond mutual funds, and money market funds. [Top]
What
information about my retirement plan am I legally entitled
to have?
You're
entitled to a Summary Plan Description (SPD) which outlines
how the plan works, a summary annual report and an annual
statement. Fortunately, we provide much more and make
resources available so you can also do your own research.
[Top]
How
do I know how well my retirement investments are doing?
If
you have invested in a retirement plan, it's important
to stay abreast of how your investment is faring. You
can get a handle on how your retirement portfolio is
doing on a daily or weekly basis by accessing your account
online and checking your balances and contribution to
date as well as running historical performance reports
regarding your investments.
Furthermore,
we provide an annual statement that shows the amounts
you have contributed and how those investments have
performed for that year. [Top]
Do
employers or the government guarantee retirement accounts?
Employers
never guarantee retirement
accounts. They are considered "fiduciaries"
of retirement
plans, which means they are legally responsible for
supervising the plan and the money you invest.
This
supervisory relationship obligates the employer "to
protect your financial interests by choosing and monitoring
reputable and competent administrators and investment
managers. Employers must give plan participants at least
three distinctly different investment choices, each
having a different level of risk. You must also be given
the opportunity to move your money among these investments
at least quarterly, and sufficient information to make
sensible, informed investment decisions. But your employer
doesn't offer you protection against any investment
losses you may suffer.
Although most traditional pension plans are insured
by the federal government, there is no such guarantee
for retirement
accounts. The federal Pension Benefit Guaranty Corp.
insures traditional pension plans because the government
wants to ensure that the payments a company promises
its retirees will indeed be made. But retirements
do not involve a promise of future benefits. The value
of your account will rise and fall over the course of
the years. [Top]
Can
I invest in both my company's 401(k) plan and an Individual
Retirement Account?
You may be
permitted to invest in a 401(k) plan and an IRA. However
depending on your salary, the amount you contribute
to your IRA might not be tax-deductible. Under current
law if you are covered by an employer retirement plan
and you did not receive any social security retirement
benefits, your IRA deduction may be reduced or eliminated
depending on your filing status and modified Adjusted
Gross Income (AGI). For 2009, if you are covered by
a retirement plan at work, your IRA deduction will not
be reduced (phased out) unless your modified AGI is:
-
More than $55,000 but less than $65,000 for a single
individual (or head of household),
-
More than $89,000 but less than $109,000 for a married
couple filing a joint return (or a qualifying widow(er)),
or
- Less
than $10,000 for a married individual filing a separate
return.
If
your spouse is covered. If you are not covered
by an employer retirement plan, but your spouse is,
and you did not receive any social security benefits,
your IRA deduction may be reduced or eliminated entirely
depending on your filing status and modified AGI.
Filing
status. Your filing status depends primarily
on your marital status. For this purpose, you need to
know if your filing status is single or head of household,
married filing jointly or qualifying widow(er), or married
filing separately. If you need more information on filing
status, see Publication 501, Exemptions, Standard Deduction,
and Filing Information.
Consult
with your tax advisor to determine the exact deductible
amount. (or visit www.irs.gov
for Publication 590) [Top]
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