401(k) Retirement

A 401(k) is a type of retirement plan that enables employees to save for their future retirement. Employees, including seniors, must understand how a 401(k) works and can help them retire in a timely manner.

Additionally, they must determine when a 401(k) distribution can occur and how to fully utilize their accounts to secure a stable retirement.

The following sections explain what a 401(k) retirement means and how to obtain it as an employee. Employees can also discover when a 401(k) retirement plan may be used and the rules employers must abide by to operate it effectively. Since preparing for retirement is a challenging task, employees must know how their employee benefits are designed to help.

What is a 401(k)?

The 401(k) plans are elective savings plans that employers manage by delivering a portion of the employees’ wages to a separate account within the plan. Because a 401(k) is optional, not all employers offer these retirement plans and may provide different services or savings options as an employee benefit. Older employees who have transferred to new employment may need to consolidate their plans or cancel them in some cases. Employees are encouraged to talk to their employers to ask about company-specific 401(k) policies that may affect their ability to adopt or rollover such a savings plan.

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Several types of 401(k) retirement plans are available to employees, but the types offered to them may depend on their employer. A list of the types of 401(k)s is outlined below:

  • Traditional plans
  • Safe harbor plans
  • SIMPLE plans

Each plan has varying 401(k) rules that pertain to eligibility requirements and administrative guidelines. Most plans have nondiscrimination requirements, notice deadlines and clauses preventing beneficiaries from receiving retirement funds via other plans offered by the employer. These rules also limit the amount of an employee’s wages that employers may add to a 401(k) account based on total wages and annual salary averages.

The advantages of a 401(k) are plentiful, but the main benefits of finding a good plan differ for employees and employers. For employers, the advantages consist of tax advantages and returns. For employees, the primary benefit is the financial contribution the account offers them during retirement. However, employee benefits may not be utilized immediately. Instead, they must continue to accrue until a 401(k) distribution can commence, making the receipt of benefits changeable due to the economy and the funds available in the account at the time of distribution.

Note: Self-employed workers, or workers without an employer, may contribute to a 401(k) if they join a SOLO plan, but most are encouraged to save for retirement using other methods.

How a 401(k) Retirement Plan Operates

When employees enter a 401(k) plan with their employer, they begin adding money to the account on a monthly or yearly basis. Any withdrawal from the account, also known as a 401(k) distribution, is prohibited until employees encounter one of the following circumstances:

  • Employees die, become disable or leave employment through no fault of their own.
  • The employer terminates the 401(k) plan without a successor.
  • The employees turn 60 years old or suffer a financial hardship.

Occasionally, employers will require permission from the employees or their spouses before making withdrawals, but most companies automatically begin withdrawals once an employee is in one of the above situations. Each 401(k) distribution may be either periodic or nonperiodic, meaning that retirement withdrawals are made in lump-sum payments rather than in installments. Rollover funds from other retirement savings accounts provided by employers may be considered before distributions are made because account balances cannot exceed $5,000. The required beginning date for beneficiaries is April 1, which is when beneficiaries can expect to receive full 401(k) benefits or periodic payments of their benefits. Benefits will be distributed to qualifying employees regardless of their employment status after they turn 70 years old.

How to Find a 401(k)

Often, 401(k) plans are obtained automatically through an employer. Employees can participate in their employer’s 401(k) plan or contribute to a SOLO account independently. If seniors want to locate a previous 401(k) account held by an old employer, they can follow these steps:

  1. Contact a previous employer who managed the account.
  2. Check old 401(k) distribution statements for account details or contact information.
  3. If you suspect your old plan may have been terminated, check with the U.S. Department of Labor to be sure.
  4. Consolidate your former retirement funds into new and active accounts to better manage your money.

Seniors are reminded that high fees may be associated with previous accounts.

Note: While retirement plans, such as 401(k)s, are meant to be indefinite, seniors may terminate plans if they find that a different plan better suits their retirement needs. Additionally, seniors may close their accounts when they retire or change jobs. To end a plan, seniors must formally amend the plan by adding a termination date, stop making financial contributions to the plan, notify all essential parties of the plan’s termination, fully withdrawal all funds from the account and file all necessary paperwork. However, seniors are not advised to do so as taxes and financial penalties may be enforced in some circumstances.

401(k) Rules

All 401(k) plans must comply with federal and state tax laws, so seniors must understand how to correct their plans to meet these regulations. An IRS-approved checklist can help seniors determine if their 401(k) investments comply with all other legal requirements as well. Although the checklist is designed for employer’s use, the following questions that appear on these types of checklists can also assist seniors in finding inherent issues with their retirement plans:

  • Has your 401(k) been updated within the past few years? Employers must be updated to adhere to recent law changes. If you haven’t had to update your plan, you may want to contact your employer and ask about his or her upcoming plans to update it.
  • Has your plan followed the plan document terms? You should completely review the terms of your 401(k) agreement to ensure your employer is meeting your expectations. If they are not following the terms of your agreement, you should confront and amend the issue.
  • Is the correct definition of “compensation” being used for deferrals and allocations? Compensation may include your wages, commissions and tips, bonuses and any other amounts received from an employer. The incorrect interpretation of “compensation” can lead to improper allocations during distribution. If you notice withdrawals of differing values being given to you, you should ask your employer which funds are being used.

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