Anyone who has ever looked into retirement savings plans has likely heard of the 401k plan. This is because 401k plans are one of the best ways to save for retirement. Not everyone qualifies for a 401k plan, though, so it is important to understand the Internal Revenue Service guidelines for these plans. Not only that, but it is critical to know the 401k contribution rules that apply to this type of retirement fund, especially if you have more than one retirement account.
Still, when comparing the 401k plan with other retirement plans, the 401k is almost more beneficial than any other account because you can contribute significantly more money to fund your retirement years. Before you get a 401k plan, though, take a look at the rules set forth for these plans to make sure it is the best option for you.
Who Can Participate in a 401k Plan?
You are able to participate in a 401k plan if you are an employee of a company that offers this type of retirement fund. In addition, you are also eligible to establish an individual 401k plan if you are self-employed and have no full-time employees other than yourself and your spouse. You are not able to get a 401k plan if you are an individual who does not own his or her own business or if you do own a company and have any full-time employees other than yourself and your spouse.
Some of the benefits associated with a 401k plan, besides the additional contributions, include the ability to take out a loan and the employer match feature. Although it’s almost never a good idea to take out a loan on your 401k, it is nice to have the option if you need emergency cash. You are, in effect, taking out a loan from yourself and you will be paying yourself back with interest. However, during the period you have the money out of your account, you are losing valuable interest and investment opportunities that could make that money grow for your retirement.
The employer match feature of a 401k plan is one reason why most employees who are given the opportunity to participate in one choose to allocate some of their paychecks to a retirement fund. Employers can match employee contributions up to $52,000. It is up to the company to decide how much they want to match, but most employers choose to match up to a set percentage. For example, many employers will match 100 percent of contributions up six percent. So, if you contribute six percent of your paychecks to your 401k, you employer will match you dollar for dollar. This is essentially free money, and if you have the chance to contribute to a 401k, do it.
Self-employed individuals can also “match” employee funds, but since you are acting as both employee and employer, you are basically putting significantly more money in your account for your retirement. You can contribute 25 percent of your income to a solo 401k plan in addition to the amount you contribute as an employee.
Understanding 401k Contribution Rules and Limits:
As an employee of a company that offers a 401k retirement plan, you are allowed to contribute up to $17,500 for 2014. You can contribute this amount all at once, or you can contribute it in increments through paycheck withdrawals, which is how most people do it. The most important thing to remember is that if you have more than one 401k account, the 401k contribution rules say you can only contribute a maximum of $17,500 for all accounts. This is an important rule especially if you have a solo 401k for a business you own in addition to a traditional 401k plan through an employer.
The 401k contribution guidelines also allow people who are over the age of 50 to contribute an extra $5,500 per year to their 401k accounts as “catch-up” contributions. This is a rule that is aimed at helping people who are nearing retirement get as much funds in their accounts as possible before leaving the workforce in a few years.
Regardless of the contribution rules for a 401k, it is still one of the best types of retirement accounts available. You can save a lot more money than you can with other kinds of accounts, you have the flexibility to take out loans, and you are getting what equates to free money from your employer in the form of matching funds. If you are eligible to participate in a 401k plan, it is highly recommended you do so as quickly as possible.
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