The Internal Revenue Code was amended by Congress in 1978. Among the changes made was the addition of section 401(k), which dealt with the establishment of programs that would help with the retirement of business executives.
However, it soon became apparent that the type of retirement fund that had been developed was even better suited to workers. This was largely due to the fact that its contribution limits were far above those of Individual Retirement Accounts (IRA). It also allowed for employer contributions that matched at least some part of the employee contribution.
What is a 401k Plan?
Most standard pension plans are limited by highly structured payments and the inability to choose different investment types. The Internal Revenue Code, in section 401k provides for a program that gives retirement benefits with much better flexibility.
401k plans allow you to put tax-defferred funds from every paycheck into an investment of your choice, under the supervision of your employer. Not only can you choose how your money will be increased over the years, but you can potentially increase the final yield. The investment options for 401k plans are numerous, ranging from mutual funds to bonds to money market funds. You also have the option to change your investment at any point during the life of the 401k plan.
What is the Eligibility for a 401k Retirement Fund?
For the exact information that pertains to your company’s 401k plan and your eligibility, you should contact the administrator of your plan or the appropriate official within your workplace that can provide you with a Summary Plan Description (SPD). However, there are basic guidelines that all 401k plans will invariably follow.
You must be employed by a company that actually offers 401k Retirement Plans. Even if you are able to afford contributions and desire to invest in your retirement, you must be working for a business in the 401k program or you cannot invest in it.
Depending upon your company, the time period will be different. What is not different is the fact that you will not be able to being investing in a 401k plan upon the beginning of your employment. The period will not exceed one year.
Even if you are in the upper level of management or have enough money to contribute enough of your paycheck consistently, you must be 21 years of age to be eligible.
What kind of 401k Investment Opportunities Exist?
It is important to keep in mind that each type of investment has its own degree of certainty and uncertainty. Since all investments perform differently, one way to manage risks is to diversify your portfolio by investing in a blend of different types of assets.
Aggressive Growth Funds are comprised of stocks with greater-than-average potential for growth. Such stocks might include start-up companies, smaller companies, or companies in high-risk industries.
Balanced Funds are also known as Life Style Funds or Asset Allocation Funds. Blending both stocks and bonds; these funds allow diversification with potentially lower risk.
Bonds Funds represent loans to Federal or local governments or to a corporation, with a promise to repay at a set interest rate at a predetermined amount of time.
Growth and Income Funds invest in companies with strong growth potential that also have a solid record of paying dividends (income).
Growth Funds investing in relatively stable and established companies, which may or may not pay dividends. These funds try to identify companies whose stock values are expected to increase.
International or Global Equity Funds invest in stocks outside the United States. While Global Equity Funds invest in both foreign and U.S. companies.
Money Market Funds typically consist of U.S. Treasury Bills, Certificates of Deposit (CD‘s), and other commercial investments.
Mutual Funds pool money from many investors and can invest it in various securities such as stocks, bonds, and money market instruments, and are designed to help reduce, but not eliminate, risk.
Stable Value Funds are designed to provide consistent, predictable growth over the long term. Sometimes referred to as the “fixed fund” or “guaranteed fund,” these funds are typically backed by contracts issued by insurance companies. This option is generally considered low risk. Company Stock- By selecting your employer’s stock you acquire an ownership interest in the company.
Stock Index Funds attempt to “mirror” the performance of the stock market indexes, such as the S&P 500.
401K Plan Advantages
When an employee enters into a 401k Retirement Plan, it is up to them to decide how much money they put into their investment.
Any taxes that are to be paid upon money made from 401k investments are assessed after interest has been accrued. This means that the interest and growth on your investment is made with more money in your account than if taxes were pad when money was first invested.
People paying money into their 401k can regularly change and modify their investments with many different types of funds, such as mutual funds, bonds, and stocks.
Rolling Over 401k
You can easily move or “roll-over” your 401k Retirement Plan to another job and another type of investment when you go to another place of employment.
Many employers will choose, as a 401k incentive to contribute some amount of money to your Retirement plan every time that you do so.
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By Michael Brown
Retirement planning expert and rollover IRA to gold adviser.