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The Standard 401(k) and Its Key Features

The 401(k) is a workplace retirement savings plan that has become a cornerstone for millions of Americans seeking financial security in retirement. Named after the section of the U.S. Internal Revenue Code that established it, the 401(k) allows employees to contribute a portion of their paycheck into an investment account on a pre-tax or post-tax basis. These funds grow tax-deferred until withdrawn in retirement. Many companies, both large and small, offer this type of plan, making it a widely accessible tool for retirement planning.

 

Companies That Provide 401(k) Plans

Several well-known companies and financial providers offer 401(k) plans, tailored to fit businesses of different sizes:

• Walmart provides a 401(k) plan with an employer match to help associates grow their retirement savings.
• Slavic offers customized 401(k) solutions for businesses, often working with small to medium-sized companies.
• Ubiquity specializes in 401(k) plans for startups and small businesses, making retirement planning accessible to companies with fewer employees.
• Schwab offers comprehensive 401(k) plans with low-cost investment options and robust tools for participants.

 

How Much to Contribute to a 401(k)

Determining how much to contribute depends on your financial situation and retirement goals. A general recommendation is to contribute at least enough to capture any employer match. If your employer matches up to 5 percent of your salary, aim to contribute at least that amount. Experts often suggest aiming for a total contribution of 15 percent of your salary, including employer contributions, to build a sufficient retirement fund.

 

401(k) Contribution Limits and Employer Match

For 2024, the IRS has set the annual contribution limit at $23,000 for employees under 50. Those aged 50 or older can make an additional $7,500 in catch-up contributions, bringing their total limit to $30,500. The employer match is not included in these limits, so the combined contributions from you and your employer can be even higher, capped at $66,000 for most employees or $73,500 for those eligible for catch-up contributions.

 

Withdrawing from a 401(k)

Withdrawals from a 401(k) are generally restricted until the age of 59½ to avoid penalties. At that point, withdrawals are taxed as regular income. If you withdraw funds earlier, you could face a 10 percent penalty on top of the income tax, unless the withdrawal meets certain exceptions like a first-time home purchase or significant medical expenses. Once you reach 73, required minimum distributions begin, ensuring funds are eventually withdrawn.

 

Borrowing from a 401(k)

Many 401(k) plans allow loans, giving participants access to their funds without triggering penalties or taxes. These loans typically let you borrow up to 50 percent of your vested balance or $50,000, whichever is less. Repayment terms usually span five years with interest paid back into your account. While borrowing may be helpful in emergencies, it can impact your retirement savings growth if not repaid promptly or if you leave your job before repayment.

The 401(k) is a powerful tool, but it’s important to fully understand its features, rules, and the benefits of careful planning to maximize its potential.

 

Understanding 403(b) and 401(k) Plans

While both 403(b) and 401(k) plans help individuals save for retirement, they cater to different types of employees and have unique features. Knowing the differences can help you choose the right plan or understand the benefits if your employer offers one.

The 403(b) is often available to employees of nonprofit organizations, public schools, and certain government entities. It allows participants to invest pre-tax or Roth contributions into mutual funds or annuities. One notable benefit is that 403(b) plans may have lower administrative costs, making them attractive for smaller budgets.

The 401(k), on the other hand, is offered by private-sector companies. It provides a wider range of investment options, including mutual funds, index funds, and company stock. Employer matching is more common in 401(k) plans, making them particularly appealing for those looking to maximize their retirement savings.

 

Key Differences Between 403(b) and 401(k)

• Eligibility: The 403(b) is designed for nonprofit and public-sector employees, while the 401(k) is for private-sector employees.
• Investment Options: 401(k) plans often provide more variety, while 403(b) plans may limit choices to annuities and mutual funds.
• Catch-Up Contributions: Employees with 15 or more years of service in a 403(b) can contribute an additional $3,000 annually, beyond the standard catch-up contributions.

 

401(k) Maximum Contribution Limits

The IRS sets annual limits on how much employees can contribute to their 401(k) accounts. For 2024, the maximum contribution limit is $23,000 for individuals under 50. Employees aged 50 or older can make an additional $7,500 in catch-up contributions, bringing their total to $30,500 for the year.

It’s important to note that these limits apply to employee contributions only. Employer matching contributions are not included in these caps. The combined contribution limit for employee and employer contributions is $66,000, or $73,500 if you are eligible for catch-up contributions.

To make the most of your 401(k), contribute enough to take full advantage of your employer’s match. It’s essentially free money that can significantly boost your retirement savings over time.