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401k Plans Help Employees and Business Owners Retire Early

Posted by Dario Montes de Oca

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Jun 24, 2014 11:28:00 PM


401k Plans Help Employees Plan for Retirement

A 401k plan is a retirement savings plan for a company’s employees where they can save money for the future. Under a 401k plan this money is a tax deferred contribution plan that employees can choose to add money to and that money in turn gains varying amounts of interest over the years, thus adding to the employee’s retirement savings.

Since a 401k plan is money saved prior to being taxed, the thought is that it will save people because they won’t have to pay taxes on it before they take money out when they retire. Sometimes they are called a Thrift Savings Plan. With some plans, the employer contributes by matching the funds put in by an employer, while in others, they don’t do so.

How Does a 401(k) Plan Work?

With most 401(k) plans, the money is deducted from a person’s paycheck before taxes, while some let the person put in more money after taxes. Also, there are special 401(k) Roth plans where the 401(k) is combined with the features of a Roth IRA, that way they can put in money after taxes, but the money can then gain through the current interest rate, but still isn’t taxed until it is withdrawn at retirement age. For this to happen, the account must have been owned for at least five years and the owner must be at least 59 ½ or older, or disabled to get the tax break.

Contribution Amounts Have a Maximum

The Internal Revenue System specifies that owners of a 401(k) plan can only contribute up to a maximum amount per year. This amount is subject to change, and in 2014 the amount was set at $17,500. However, people over 50 years old are allowed to make what is called a catch up contribution that can be as much as $5,500 above that maximum amount. However, if you're self employed you can contribute up to $52,000 per year through a solo 401(k).

Even though a 401(k) plan works through a person’s job, the employee is the one that has total ownership even if they change jobs. However, in some cases, part of the funds in the account include funds from an employer that may not be fully vested to the matching contributions immediately, so if you plan to change jobs and take the 401(k) plan with you elsewhere, you must find out the company’s vesting schedule in order to not lose those additional funds.

401(k) Plans Add up Quickly

If you have a 401(k) plan, then you are doing well for saving for your retirement, depending on how much is put into it and how old you are when you started it. For instance, if you are in a job that has a salary of $35,000 a year and in the 25 percent tax bracket margin, then if you decide to contribute six percent of that income it will help you to lower your tax burden by $2,100.

You only get the tax benefit if you wait to take out any 401(k) funds until you are 59 and a half years old or become disabled. In addition, it’s required to take money out by the time you are 70 and a half years old unless you are still working for the company that sponsored the 401(k) plan you have.

Changing Employers and Your 401(k) Plan

If someone decides to change employers or leave a job, you can do several things with your 401k plan funds. This includes rolling it over into a new employer’s 401(k) plan program, rolling over the balance into an Individual Retirement Account, or leaving it where it is if your employer allows this. Or, you can withdraw it all out, but this is a bad idea, as it can mean high tax penalties if you are not old enough according to withdraw laws. This could mean losing a large portion, so is an unwise thing to do in most circumstances.

Rolling Over 401(k) with a Self-Directed IRA to Buy Real Estate

However, If you use your 401(k) plan by rolling it over into a self-directed IRA, one thing that can be done is to use it to buy real estate as part of an IRA investment. A self-directed IRA allows one to invest in real estate on a tax deferred or a tax free basis. A self-directed IRA is one that lets the owner direct the trustee of the account to make a wide range of investments unlike in other kinds of IRAs.

While investing in real estate has been allowed for quite some time, this option was more popular in the past few years. Many people like this option because they see it as being more stable than other forms of investments like the stock market, for instance. That is because a self-directed IRA lets people have these kinds of options, while other kinds of IRAs only let them get things like stocks, bonds, CDs or mutual funds. With a self-directed IRA you can buy real estate or invest in things like gold, silver and notes.

Being able to own real estate inside of a self-directed IRA is a thrilling prospect that lets the person own property such as land, single family or multi-family homes, or commercial property. However, it must be remembered that the real estate owned through the IRA is considered only as an investment and the owner of the IRA can’t use it themselves, nor can any other disqualified people. Plus, any profits produced through this property like rental income or money from it being sold, has to be put into the IRA, and any expenses the property incurs like taxes or any type of improvements has to be paid for via funds from the IRA.

The bottom line is that having a 401(k) retirement plan is a great way for someone to ensure that they will have funds for the future when they retire. It is best to start one as soon as you are able, as that will ensure that as much money as possible is invested in this retirement plan.


Topics: 401k

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