Retirement Plans
July 12, 2009 – 10:23 amWelcome back!
If you work for a company that will help finance your golden years, consider yourself lucky. Since 1990 nearly 50,000 U.S. Firms have axed the traditional, company-paid pension. This benefit is quickly becoming a relic of the past. In 1988 close to 80% of the nation’s small- and medium-size companies offered this type of retirement package. That figure is closer to 65% today. Instead, the majority of companies are asking employees to fund their own retirements, most typically with 401(k) accounts; nonprofits often offer similar vehicles, known as 403(b) plans. Named for a section in the tax code, such “defined-contribution” plans let you stash away dollars, before they’re taxed, through payroll deductions. The earnings grow in your account tax-deferred. By federal law, employers must offer several places for you to park your 401(k) dough, such as stock and bond funds, money-market funds, and company stock. As a bonus, most employers will match a portion of your contributions, usually 50c for every dollar you ante up.
If your company offers a 401(k) plan, sign up as soon as you’re eligible. This may sound about as obvious as “Eat your vegetables”, but only 65% of all eligible employees participate. To help make your retirement comfortable, contribute as much as you can afford, as early as you can. Recently, the allowable maximum was roughly $9,500. Generally speaking, however, if your salary falls in the top 20% for all earners at your firm, you can probably contribute no more than 6% to 7% of your pretax salary to the plan. Some plans also let you salt away after-tax dollars.
As you hopscotch from one job to the next, remember that unlike the assets of a traditional pension plan, the money in a 401(k) is fully portable as long as you follow a few rules. In order to escape costly taxes and penalties when you leave company A for company B, you must “roll over” your 401(k) proceeds into an Individual Retirement Account or to your new company’s retirement plan. Keep in mind, the clock is ticking. You have just 60 days to do this before the tax man cometh.
To transfer funds properly, do not request a check from your old employer. You’d be taking possession of your 401(k) assets, which is a sure way to get slapped with the dreaded 20% federal withholding tax. Instead you’ll want to do a “trustee-to-trustee transfer”, in which funds go directly into the investment you’ve selected for your IRA 9typically a mutual fund) or from the plan administrator at one job to the next. Before switching jobs, you’ll want to discuss these moves with your benefits department to ensure the transfer goes smoothly. The process may take several months or even up to a year.
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One Response to “Retirement Plans”
“You’d be taking possession of your 401(k) assets, which is a sure way to get slapped with the dreaded 20% federal withholding tax.” ISn’t this tax taken off later anyway when you withdrawl the money?
By Stephanie on Jul 27, 2009