401K Execution Management
Over the course of their careers, employees with 401k plans will first have to make yearly contributions to their savings. Next, employees will have to manage the funds in their 401k plans in order to protect and grow their savings. Finally, when retirement age looms near, it will be time for the employee to withdraw funds from the 401k plan. At each step, there are certain requirements which need to be fulfilled. In this article, we will take a look at these requirements, and outline the basic steps an employee needs to take regarding the 401k execution management of his or her 401k retirement savings plan.
There is a federally mandated limit to the amount of money which can be placed into a 401k plan each year. This is known as the 401k contribution limit. Currently the contribution limit stands at $16,500 (for the year 2010), but the limit is adjusted (increased) for inflatioin. Employees who are over the age of 50 this year may also be allowed to make an additional “catch-up” contribution of $5500. There are two types of 401k plans – the traditional 401k, and the Roth 401k. In plans with a Roth option, employees are allowed to choose which type of contribution they would like to make – or even split their contribution between the two types of plans – so long as they do not exceed their contribution limits. Money contributed to a 401k plan in excees of the contribution limit will have to be immediately withdrawn by the employee, or else he or she will face taxes and penalties for their “non-qualified” contributions.
Once contributions are made to the 401k plan, employees typically have options in terms of how to invest their savings. Stocks, bonds, and mutual funds are popular choices. Some employers even allow their employees to invest their 401k savings in company stock. This can be a risky move, however. In this situation, if the employer company suffers – or even goes out of business- the employee might find himself without a job, but also without any retirement savings as well. For this reason, it is important for employees to diversify their 401k savings among a number of unrelated, low-risk investments.
Withdrawal from a 401k plan requires the employee to pay income tax on the total amount. The withdrawal is treated as ordinary income. The withdrawal requirement for a 401k plan is that the employee must be 59.5 years of age. Otherwise, a withdrawal before that age results in an additional tax of 10%. The ordinary income tax does not apply to Roth 401k contributions, which are made with post-tax dollars.
As noted above there are certain requirements that need to be completed regarding the 401k execution management of his or her 401k retirement savings plan.