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What is the Purpose of a 401k Plan

401k 2 What is the Purpose of a 401k PlanA 401k plan or Retirement Plan allows a worker to save for retirement and have the savings invested while deferring current income taxes on the saved money and earnings until withdrawal. More and more employees are investing in their futures through 401k plans. Employees who participate in 401k plans will be assuming responsibility for their retirement income by contributing part of their salary.

The rules for withdrawal from your 401k account are dictated by the age that you are at the moment of withdrawal and also the reasons for withdrawal.

401k Withdrawals Rules

When it comes to age you can withdraw money without penalty once you are 59 and half years of age or when you are leaving your employer when you are at least 55 years or have become disabled. The penalty for early distribution is ten percent because a 401k retirement plan is an account where one should keep their savings until they retire. If the money that you withdraw goes into a different employer sponsored plan or an Individual Retirement Account (IRA) also called as rollover, you can avoid the penalty.

There is something called as hardship withdrawal where one is permitted to withdraw for specific purposes like buying a house or avoiding eviction or foreclosure on a house, for paying medical expenses exceeding more than 7.5 percent of your adjusted gross income, for paying college tuition, and upon death or disability of the plan investor. To avail facilities like these documents have to be provided to show why you want the money and also prove that the amount you want to withdraw is not bigger than the payment you have to make.

401k plan rules vary with company even though they have the same guidelines provided by the IRS. For some the rules for withdrawal say that one has to start taking withdrawals when they are 70 and half years old, if they didn’t already start withdrawing.

401k Contribution Limits

The 2009 401(k) contribution limit is $16,500. If you reach age 50 by this year end December 31, 2009, then you are eligible to contribute an additional $5,500, for a total contribution of $22,000. For the previous year, the base contribution limit is $15,500 with a possible $5,000 catch-up contribution, so the potential total contribution for someone 50 or older is $20,500.

Your employer’s restrictions may cause your individual contribution limit to be somewhat lower. Possible causes include a cap on the percentage of pay you are eligible to contribute and your employer not yet allowing for catch-up contributions.

If you are among those who direct your investments, you will need to consider the investment objectives, the risk and return characteristics, and the performance over time of each investment option offered by your plan in order to make sound investment decisions. Dipping into your retirement funds is a big decision and is worth discussing with the people in charge with your 401k plan as well as with a tax specialist. A 401k plan is one of the best ways to save for retirement.

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