Back to Basics: 401(k) Plans for Beginners

American Investment Planners LLC

500 North Broadway, Suite 260, Jericho, NY 11753

(516) 932-5130 / (866) 932-5130

There are a lot of factors to consider before accepting a job - the salary, the hours, the work itself - but one factor in particular that is extremely important is the company's retirement options. Essentially, are there any retirement plans, such as a pension or a 401(k) available for you?

If you're just getting ready to enter the workforce, we know that there's a lot of information to take in, especially when it comes to retirement. That's why today, we're going back to the basics and breaking down 401(k) plans for you - here's what you need to know:

1. Most importantly, what is a 401(k) plan?
A 401(k) plan is a retirement plan that is funded through deductions from your paycheck on a pre-tax basis - the "pre-tax" aspect of this type of plan is just one factor that makes it so ideal. Within your account you can invest your funds in a number of ways, including stocks, bonds and mutual funds (more specifics available by contacting us!). 

2. Are all 401(k) plans the same?
No, all 401(k) plans are not the same. 401(k) plans are offered through the company that employs you, and each company typically has their own rules and regulations for their plan in addition to the rules and regulations that the IRS has. For example, X company may require you to contribute 5% in order to obtain an employer match, while Y company may only require 3%. On the other hand, some companies may not match at all. As you start to set up your account, it's important that you speak with your employer to learn all the ins and outs of the plan.

3. What are the benefits of a 401(k) plan?
Aside from the obvious benefit of helping you prepare for retirement, 401(k) plans are extremely beneficial due to their tax advantages, flexibility, loan options and more. As we mentioned in question number one, the funds you contribute are typically on a pre-tax basis, and moving onto another benefit, many employers offer a match program where they will contribute to your plan on your behalf too - that's basically free money if you think about it! Additionally, some plans have loan and hardship withdrawal options should you need to take your funds out early, and you really get to customize your plan however you want according to your financial goals.

4. Are there contribution limits?
Yes, there are limits to how much you can contribute to your 401(k) plan, and these guidelines are set forth by the IRS. There are two kinds of limits that apply to your contributions, and they are as follows:

1. A limit on total contributions to your plan, including employee elective deferrals, employer contributions and forfeiture allocations.
2. A limit on employee elective deferrals specifically.

This year, the deferral limit on employee elective deferrals for safe harbor and traditional plans is $18,000. More information on 401(k) contribution limits is available here.

Still have questions about the specifics of 401(k) plans? We're here to help! And in addition to going over the basics of 401(k) plans with you, we can also work with you to better understand your investment options. To set up an appointment with one of our financial advisors, please give us a call at (516) 932-5130 or email info@americaninvestmentplanners.com today.