UGBA 196: 401K plan

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401K beneificiary

-always the spouse

401K plan

-similar to an individual retirement account except that it must be established by the employer

401k investments

-will have to select from a list of approved investments provided by your employer -you can diversify and allocate your contributions

401K Loans

-you can borrow up to 50% of your vested balance, not to exceed 50,000 -loans must be repaid over no more than 5 years unless used to purchase a first home interest is 1-3% over the prime rate -usually interest and principal are repaid via payroll deduction

comparing the Traditional 401K with Roth 401K

-your contributions to a 401K are tax deductible, but contributions to a Roth are not -distributions from a 401K are taxable. roth are tax free -401k can be rolled into a TIRA or new employer's 401K, roth 401K can be rolled into a Roth IRA or into a new employer's roth 401K -if you decide to roll over your 40K plans into those of a new employer, you may have to sell the old incvestments in the new employer;s plan since they are not likely to be the same -

3 types of vesting schedules

100% vesting: you own all contrubutions including your own and your employer's matching funds cliff vesting: you don't own any of the matching funds until you've worked for the company for a period of time, but it can't be longer than 3 years graded vesting: you get a percentage of the employer's match each year. it is usually 1/3 of the employer's contribution per year for 3 years, but it could be 20% over five years or some other schedule

Self Employment Retirement Plans

Solo 401K plans: strictly for the sole proprietor who has no employees except possibly a spouse -allows the proprietor to save both as an employee and as an employer up to the lesser 25% of income or 51000 -contributions are voluntary -both Traditional and Roth type variations are available SEP IRA: simplified employee pension individual retirement account -for self employed individuals and small business owners with only a few employees -can contribute up to the lesser of 25% of income or 51000 -contributions do not have to be made every year but if you choose to contribute you must contribute to your own SEP IRA plan and the SEP IRA plan of every eligible employee

similarities between 401k and roth 401k

all earnings are tax sheltered -no difference in contribution limits-->17500 can be put into either account or shared but total cannot exceed 17500 combined for any one year -no difference in what is an eligible investment -no difference in the matching contribution percentage but the contribution MUST GO INTO A TRADITION 401K ACCOUNT -all contributions made by the employer are tax deductible to the employer

Roth 401K plan

companies who have Roth 401k plans are allowed to add a Roth 401K plan but are not required to -no tax decuctions for contrubution but no taxes are due at withdrawal'income limit and phase out is 17500 (23500 for over 50) including any contribution to your 401k plan but not to exceed 25% of your wages

457 agencies

defined contribution plans established by government agencies -only funded by your contributions

403b plans

defined contribution plans established by non-profits, allow matching contributions from non-profit employers

401K employer contributions

many employers will match all or part of your contribution

401k maximum contribution

maximum contribution is 17,500 (23500 over 50) as long as it does not exceed 25% of your combined earned income and your employer's contribution

defined contribution plan

the contribution, not the benefit is defined -all or portion of the employee's contribution may be matched by the employer -usually funded with pre-tax salary contributions and matching company contributions

401k rules

the employer's plan may not discriminate against lower paid employees -employee contributions are tax deductible -growth within the 401k is tax sheltered -when withdraws are made they become taxable income subject to ordinary tax rates in the year of withdrawal -usually cannot withdraw funds without penalty before age 59 1/2 except under special circumstances

Vesting

the process by which you will accrue non-forfeitable rights to the contributions made by your employer -you will be 100% vested in your own contributions since that is your own money but the employer does not have the right to put conditions around your getting his contributions if you leave, are terminated, or take early retirement

401K plans are portable

when you leave your employer you can take the plan with you


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