A 401(k) is your company-sponsored retirement plan. A vast majority of Americans invest in this contributory pension plan to save up for a happy and peaceful retirement. In March 2020, 58 million Americans had assets worth $5.6 trillion across 580,000 401(k) plans.
Types of 401(k) Plans
There are two kinds of 401(k) plans:
- Traditional 401(k): The earnings on the investment are not taxed until withdrawal.
- Roth 401(k): The employee funds the investment with the money available after tax deductions. This is preferred by people who expect to be in a higher tax bracket at the time of retirement. The withdrawals are tax-free.
Irrespective of the plans chosen, most Americans preferred to invest in equity funds, followed by target-date funds and bonds.
Can a Non-Citizen Invest in a 401(k)?
Yes, if your American employer offers it. The rules of withdrawal and transfer of funds are the same for residents as well as non-residents.
How Much Can I Invest in a 401(k) Annually?
As of 2020, the maximum annual contribution is $19,500 if your age is below 50 years and $26,000 for those above 50. In plans with provisions for employer contributions, for workers under 50 years old, the total combined contribution for workers is capped at $57,000 or 100% of employee contribution, whichever is lower. For those older than 50, the limit is $63,500.
What are Employer-Matching 401(k) Contributions?
If your employer contributes to your 401(k) and partially or fully matches your contribution, these are called 401(k) matching contributions. However, matching contributions is not a legal requirement. Many employers make such contributions as core benefits to retain employees.
Can I Take Loans from My 401(k) Investments?
Yes, you can, if your plan permits. The loan amount is not taxed. Typically, you may borrow up to 50% of your available balance and a maximum of $50,000. You should repay the loan within five years.
Is My Personal Information Safe In 401(k)?
It is as safe as your information on your other investments. The terms and conditions applicable to your assets in various financial instruments are applicable here, also.
What If I Quit/Change My Company?
If you quit your job, there are four things that you can do with your 401(k) account.
1. Leave it with the old employer. However, some employers may request you to move the account if the account balance is less than $5,000.
2. Take the plan to your new employer.
3. Withdraw. This might attract taxes on the amount that you receive. Also, you have a 60-month window should you decide to roll the amount over to a new employer’s 401(k) or other individual retirement accounts.
4. Rollover to an IRA.
You cannot withdraw your contributions unless:
- You have become disabled or have lost, quit, or changed jobs
- The employer ceases the plan without establishing a successor plan.
- You attain age 59½ or are going through financial hardship.
The withdrawal frequency depends on the plan chosen. It could be lump-sum or periodic.
What Happens to a 401(k) Plan After Death?
In case you end up saving more than what you could spend in your lifetime, your designated beneficiary receives the amount remaining in your account.
What to Do with an Inherited 401(k)?
If you happen to be the beneficiary of an inherited 401(k), there are typically four things that you can do:
1. You may transfer the money into your own 401(k) account if you are the spouse of the account holder.
2. Take a lump-sum distribution. This attracts tax that must be paid in a single year.
3. If the account owner died before 2020, you can withdraw all the funds by the end of five years. Ten years if death occurs after 2020.
4. You can also spread the withdrawals out over your lifetime by taking the annual required minimum distributions.
The 401(k) is a by-chance product that evolved from the idea of a consultant working on a bank’s cash bonus revamp project. He thought about adding an employer-matching contribution to benefits from an obscure clause in the tax code that clarified the tax treatment of deferred compensation. There began the 401(k).
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