How Do 401(k) Plan Works

Employer Matching

Employers have the option to match their employees’ contributions to qualified plans. They can choose the amount, percentage, and timing of these matching contributions. Employers also have the flexibility to update their plans as needed.

The employer’s contributions to an employee’s 401(k) plan can be in the form of a fixed dollar amount, a percentage of the employee’s salary, or a percentage of the employee’s contribution.

For example, if an employee earns $50,000 annually and contributes 10% (or $5,000) to their qualified plan through the employer match program, the employer would also contribute $5,000.

Employer matching is a common feature of 401(k) savings plans. It allows employees to delay paying taxes on their earnings until they withdraw funds after retiring.

Withdrawal Options

Typically, you cannot withdraw funds from your 401(k) account while still working and under 59 ½ years old. However, there are circumstances where you may be eligible for a hardship withdrawal. These include:

Postsecondary tuition for you or your family

1. Medical or funeral expenses for you or your family
2. Specific costs related to purchasing or repairing your primary residence
3. Preventing immediate eviction or foreclosure of your primary residence

Hardship withdrawals from pre-tax contributions and earnings are generally subject to taxes and may incur a 10% early withdrawal penalty. These distributions cannot be rolled over to an Individual Retirement Account (IRA).

Required Minimum Distributions

The IRS mandates that all 401(k) plan holders start taking withdrawals from their accounts once they reach 73 years old. This is known as a required minimum distribution (RMD).

Failure to comply with the distribution requirements may result in severe penalties imposed by the IRS.

The purpose of required minimum distributions is to prevent individuals from keeping money in their 401(k) plans until they pass away, thereby shifting the tax burden to their beneficiaries.

If you’ve ever wondered how to save effortlessly for your future while working, we have the answer for you. By taking advantage of your employer’s enticing 401(k) plan, you can conveniently stash away a portion of your hard-earned money. It’s a win-win situation that not only helps you secure a comfortable retirement but also makes your employer more attractive to potential team members like yourself.

Whether you’re already employed or on the hunt for a new job, understanding the intricacies of your current or potential employer’s 401(k) plan is crucial. By familiarizing yourself with the plan’s unique features and benefits, you’ll be equipped to make informed decisions that align with your retirement goals.

Allow us to guide you through the ins and outs of a 401(k) plan and how it works. So let’s get right into it.