Project Retirement

A 401K plan is a company sponsored qualified retirement plan for employees. Contributions and earnings in a 401K plan are not subject to federal and most state income taxes until the funds are withdrawn. A 401K plan allows you to save money on a pretax basis with most employers contributing matching funds to make the plan even more lucrative. Usually you will have the option to decide how much you contribute (up to the maximum allowed by the government) and where you will invest your contributions (from a list of funds provided by your plan sponsor).

You can find out when you are eligible to start participating in your company’s 401K plan from your benefits coordinator. Once you are eligible to sign up, you will be given a list of funds in which you can invest. You can invest up to the yearly maximum allowed by the IRS. In the calendar year you turn 50, there is a catch-up amount you can invest in addition to the maximum for each year.

Your contributions are deducted from your pay check before taxes are withheld. These contributions are then invested into the funds you select from the sponsor's list. Your employer’s matching funds are also invested at the same time.

Most fund sponsors have a web page where you can access your account, change your investment options, and maintain your account information. You will also receive a statement of your account periodically showing how much your plan is worth along with an accounting of your investments. You should study this statement to be sure your investment strategy is working in your favor.

The best way to maximize your 401K investments is to participate in the plan. Check with your benefits coordinator to find out if and when you are eligible to start participating in the 401K plan. Next, you should contribute the maximum you can afford up to the limits placed by the government or your plan. At least contribute the amount necessary to get the company matching funds. Consider your contribution a payment to yourself and the matching funds an extra bonus. The earlier you start to contribute to any retirement fund, the more money you will accumulate at retirement. Starting early will also allow for recouping fluctuations in the market. Learn all you can about the funds offered for investment so you can make the best choice possible. Continue to research the funds offered so you can be ready to rebalance your plan if necessary.

Each company has a vesting process and it is to your benefit to understand exactly when you will become vested. The vesting schedule outlines how much of the company matching contributions and earnings on those contributions that you own at any given time. If you leave the company before you are fully vested, you will lose the unvested portion of the money in your plan.

Some 401K plans allow for hardship withdrawals. If you have a qualified hardship and decide to withdraw from your fund, the withdrawal is taxable and your ability to contribute to the fund is suspended for six months. If you are under 59 1/2 you will have to pay a 10 percent penalty unless the money is for certain medical expenses or a disability. Some 401K plans offer participants the benefit of borrowing against retirement savings. Plans usually allow you to borrow up to 50 percent of your vested assets up to $50,000. You usually must repay the loan in equal payments over a five year period using payroll deduction and you can repay the loan in full at any time. Check with your benefits coordinator for your company's policy on loaning money from the 401K plan.

Once you have started participating in a 401K plan, you should check to see if you need to rebalance your investments on a regular basis. Most companies will have a yearly open enrollment period at which time you can discuss your retirement goals with the plan sponsor. Once you have reassessed your goals and your risk factor, you can look at your investments to be sure you have the correct balance.

A 401K plan is an important part of retirement planning. You should learn everything you can from your employer about the plan that is offered. Gather information on such things as vesting, contribution limits, and matching funds. Research all available information on the funds offered for investing. Track your investments regularly and ask for assistance if you feel your investment options aren't performing satisfactorily.

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