401(k) Basics Ten things to know about your employer’s 401(k) plan

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401(k) Basics
Ten things to know about your employer’s 401(k) plan.

  1. 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).

  2. Why they call it a 401(k): The 401(k) plan was born more than 20 years ago, under Section 401(k) of the Internal Revenue Code, hence, 401(k).

  3. 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.

  4. 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!

  5. 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.

  6. “Free” money: Many employers will match some of your contributions. This is FREE money and a great incentive to contribute to the plan.

  7. Vesting: This refers to the percent of your employer contributions that you have the right to take with you when you leave the company.

  8. 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.

  9. Early withdrawals: You may be able to take a lump-sum payment before you retire, generally for emergencies (hardships) only. You’ll pay a 10% penalty and federal and state income taxes. While this is good for emergency situations, your 401(k) is a retirement savings fund, not a rainy day fund!

  10. Leaving the company: When you leave your job, you can rollover your 401(k) savings to an Individual Retirement Account, which can later be rolled over to a new employer’s 401(k) plan. This way, you stay on track for your retirement savings goals, without having to start over each time you change jobs.

This material is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent. Securities offered through Financial Telesis, Inc. Advisory products and services offered through 401(k) Advisors, Inc., Aliso Viejo, CA 92656. Financial Telesis not an affiliate of 401(k) Advisors. PTN 4/05rpt5/07 401k-1156

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