4 Things That Make A 401k Plan Different From Other Retirement Plans
If you’re looking to save for your retirement then you have probably considered a 401(k) plan. However, with various other retirement savings options available, why should you choose a 401k plan above other types of investment?
Our guide looks at four things differentiate a 401(k) plan from other retirement plans. Keep reading to learn more.
There are limits on the amounts you can contribute
When you join a 401(k) plan, you can tell your employer how much money you want to go into the account. You can usually put up to 15 percent of your salary into a 401(k) plan each month, but your employer does have the right to limit that amount.
The IRS limits your total annual contribution to $17,000 (for 2012).
Easy to save
Your 401(k) plan contributions come out of your paycheck before your taxes are calculated and before the money reaches you. This makes this type of plan one of the easiest and most convenient ways to save for your retirement.
You don’t have to make contributions to your plan yourself and you won’t be tempted to miss contributions as they are deducted before you ever receive your salary.
Matched contributions and your savings are safe
If you’re lucky, your employer will match a portion of your 401k plan contribution. This money is offered to you as an incentive to participate in the 401k scheme. By matching some of your contributions, you are effectively building up additional savings for your retirement that you haven’t paid for.
And, the Employment Retirement Income Security Act (ERISA) that was passed in 1974 includes regulations that protect your retirement income. This Act requires that all 401(k) plan deposits are held in custodial accounts in order to keep your money safe in the event that something happens to your employer.
The ERISA also sets out a list of requirements that your employer must follow, such as sending you regular account statements, providing easy access to your account and maintaining compliance so that the plan is fair for everyone in the company.
The Act also requires your employer to provide you with educational materials about the investment opportunities within your plan (see below).
Choice of investments
Your 401k contributions are given to a third party administrator who then invests it in mutual funds, bonds, stocks and money market accounts. However, they don’t determine the mix of investments — you do that. The administrator usually has a list of investment vehicles you can choose from as well as some guidelines for the level of risk you are willing to take.
However, bear in mind that there may be limited choices as to the investments you can take advantage of. Some other retirement savings plans offer a wider choice of investments which may be more appropriate depending on your personal circumstances and the amount of risk you are prepared to take.
I’m aged 53. Is my 401(k) contribution limit also $17,000 in 2012?
Bryan – thanks for your question.
No. If you’re over the age of 50 you can contribute an additional ‘catch-up’ contribution of $5,500 in 2012 (so, a total of $22,500).