Ten things to know about your employer’s 401(k) plan.
What it is: Your employer’s 401(k) plan is a defined contribution plan designed to help you finance your retirement. Federal and sometimes state taxes on your contributions and investment earnings are deferred until you receive a distribution from the plan (typically at retirement).
You decide: You decide how much to contribute and how to allocate your investments. This gives you the advantages of easy diversification – a well balanced mix of investment choices, and dollar-cost averaging by making regular investments over time.
It’s easy: You contribute your pre-tax dollars and lower your taxable income by making automatic payroll deductions. It’s a simple method of disciplined saving!
Know your limits: In 2011 you can save up to $16,500 of your pre-tax dollars. If you are age 50 or older, you can save an additional $5,500 thanks to the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001.
“Free” money: Many employers will match some of your contributions. This is FREE money and a great incentive to contribute to the plan.
Vesting: This refers to the percent of your employer contributions that you have the right to take with you when you leave the company.
Borrowing: Some plans allow you to borrow a percentage of your account value. Keep in mind that you have to make regular payments plus interest on the loan.