The deal is not sweet yet and the icing on the cake is that this retirement money is transferred to your account before taxes are deducted, making your taxes reduced. An example; if you receive 5000$ as your paycheck and you have committed 10% of your salary to the 401k account, $500 is transferred to the 401k account and then the remaining $4500 is the taxable amount.
Matching contributions/company match
The company match means the company or employers top up the amount you have placed as the contribution to the 401k savings account. Some companies match up to 0.5% of every 1% the employee contributes up to 6% and this calculates to around 3% additional amount to the savings account. For others, if you contribute 8%, they match with 2%, for a total of 10%. Some companies have plans which require a vesting period. This means you have to be with the company for the entire vesting period to get all the money offered as a match. The sweet part of this deal is that during this vesting period the company’s match appreciates with time and the longer you stay the more you receive from the company. If, in any case, you stop working for the company, the company may give you a portion of the graduated money. This program of companies matching contributions is very important to the employees, as it helps to increase an employee’s retirement funds.
Contribution limits
This plan has limits and rules which determine how much you can invest or transfer to this account from other accounts (rollover). In 2016, the maximum amount someone could save annually was $18000. The rules have a soft hand for people with over 50 years. As of 2016, these people (over 50 years) can contribute an additional amount of $6000, which is termed as the catch-up fee.
Account to account transfer rules (rollover
rules)
These rules will mostly apply when you move from one company to the next and enroll for the 401k savings account. Basically, there are two methods to rollover funds from one account to the other.
- Direct rollover-from one retirement plan account to another retirement plan account.
- In this case, both accounts must be eligible. The money is not taxable regardless of the age of the person.
- Indirect rollover
- Similar to the direct rollover, but here the employee is given cash in the form of a check to be deposited to the other account. The check should be deposited within 60 days into the new IRA to avoid penalties.
Conclusion
With such effective retirement saving schemes, you will never want to be left out. However, there are penalties in this scheme for withdrawing your money too early if you are younger than 59 and a half years old you face the risk of facing income taxes and a 10% early withdrawal penalty. With such penalties you have to be decisive, disciplined and consistent in your monthly saving and, sooner or later, you will be smiling in retirement.
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