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Frequently Asked 401k Questions

Why do I need a 401(k) plan?

Despite the common belief, Social Security will not provide the needed support to live a comfortable retirement. Shortfalls in meeting retirement expenses will have to be supplemented with personal savings. Current levels of retirement saving, however, are not nearly large enough to compensate for the projected drops in benefits from Social Security and pension plans. Personal savings has fallen, from almost 12 percent of GDP in 1965 to about five percent in 1995. According to a recent study by Merrill Lynch, the oldest Baby Boomers are saving just one-third of what they will need to maintain their current standard of living during retirement. Because Americans are going to need this supplemental support after they retire is why many people today are turning towards a 401(k) plan for increased savings.

What are the advantages of a 401(k) plan over an IRA (Individual Retirement Account)?

The IRA is the alternative retirement fund used by many individuals. However, in a 401(k) retirement fund an individual can defer as much as $10,500 ($11,000 in 2002) of your own salary on a pre-tax basis into your own account. After adding a company matching gifts contribution and profit sharing feature, the total annual savings could be as much as $25,500. This is compared to a maximum of $2,000 for an IRA.

What is a "matching fund?"

Many companies contribute a percentage of what the employee has already added to his or her retirement plan. For example, if you contribute $100.00 each paycheck to your 401(k) retirement plan, and you employer matches 50% of what you contribute, then your account would be receiving $150.00 each paycheck. "Matching funds" provide the employee with instant earnings on their investment. * To find out if your company "matches funds," ask your 401(k) plan administrator or human resource representative.

What are the advantages of having the taxes deferred?

Since the contributions to your 401(k) plan are pre-tax, meaning the employer deducts the amount from the employee's salary before calculating Federal and state income taxes, this means the employer has more real money working for their investments. The taxes are paid when the money is withdrawn from the 401(k), usually at retirement. In fact, it is because the deductions are pre-tax that the IRS sets a limit on employee contributions. The limit is to ensure the highly paid employees in your company do not abuse the tax advantages of the 401(k) plan.


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