401k Retirement Plan FAQ

Why do I need a 401(k) plan?

Contrary to the aims of thosed who designed it, Social Security will not provide the needed support to live a comfortable retirement for the current generation of imminent retirees. Shortfalls in meeting retirement expenses must be supplemented with additional income. Current levels of retirement saving, however, are not nearly large enough to compensate for the projected drops in benefits from Social Security and pension plans. Personal savings has fallen, from almost 12 percent of GDP in 1965 to about five percent in 1995. According to a recent study by Merrill Lynch, the oldest Baby Boomers are saving just one-third of what they will need to maintain their current standard of living during retirement. The need for 401k plans for a significant number of Americans is also demonstrated by the versatility and extreme growth of 401k Retirement Plans. 

What are the advantages of a 401(k) plan over an IRA (Individual Retirement Account)?

IRA's (Individual Retirement Accounts) might provide some financial security and protection for you when you retire. However, in addition to the versatility and potential for growth inherent in 401k's that make them a better choice, 401k Retirement Plans allow you to invest a much greater amount of money annually. The contribution you can make to a 401k is $10,500, growing to $25,000 when company matching funds and revenue sharing features are accounted for. IRA's are limited to only $2,000.  

How do matching funds work?

The particulars of amount and regularity will differ from company to company, but matching funds refer to the contribution some employers will make to your 401k fund for every time that you add money to it. An example of this would be an instance in which you put $100 into your fund with each paycheck. Your employer might match your addition by 50%, giving you a weekly contribution of $150. Companies institute this as a way to attract workers to the program. Find out from your company what the exact details of matching funds they follow. 

Why is tax-deferred an advantage?

Tax-deferral indicates that taxes are not taken out of your 401k until after you begin receiving payment, either when you retire, take out a 401k loan, or liquidate your fund. The alternative would be to tax the portions of your paycheck that went into the fund. Instead, your money can accrue greater interest upon a larger amount of money, giving you an overall greater profit from your investment. Limits on contributions exist so that employees do not abuse the tax-deferred status of 401k plans and put a significant portion of their paycheck into their 401k fund to avoid paying income tax on it.