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Who Establishes a 401(k)?
Employers make the decision to establish a 40(k), but it has to be good enough for employees to want to participate. An employer is responsible for establishing a 401(k) and for overseeing it as the sponsor and fiduciary. A self-employed individual can also establish an Individual 401(k), which has the same contribution limits and requires none of the testing or auditing of a regular plan. Other options for work-site retirement plans are SIMPLE IRAs, SEP IRAs, and various kinds of profit-sharing and deferred compensation arrangements. Continue reading...
What Are the Contribution Limits for My SEP IRA?
SEPs contain only employer contributions, and they must contribute the same percentage of every employee’s compensation. As of 2016, an employer may contribute the lesser of either 25% of an employee’s compensation or $53,000 annually. An important thing to note is that the employer decides whether to contribute to the employees’ SEP IRA each year; the employer is not required to make continuous yearly contributions. The equal treatment of all employees with respect to the retirement plans is a fundamental principle of all employer-sponsored retirement programs. Continue reading...
How are My Retirement Benefits Computed?
Each Defined Benefit Plan has its own formula and therefore its own calculations. These formulas need to be arranged by an enrolled actuary to insure that they’ll work over time and will hold up to IRS scrutiny. In general, however, the calculations are strongly based on factors such as your age, your salary, and the number of years you have spent working for the company. For every bit of salary you collect, or length of time you add to your tenure, you add incremental amounts to the set benefit waiting for you in retirement. Continue reading...
Can I Decide How My Money is Invested in My Defined Benefit Plan?
Employees have no control over the assets in their Defined Benefit plan. The short and simple answer is: No. The payments you will receive in retirement are calculated according to a pre-determined formula. Your employer is responsible for managing the investments, while you simply receive the agreed-upon payments when they are due to you - assuming all goes as planned. Most pension funds, as they are sometimes called, are invested in very conservative instruments such as long term government bonds and fixed accounts offered by some insurance companies and banking institutions. Continue reading...
What is a Matching Contribution?
Employers can contribute to an employee’s 401(k) on a matching basis. Some employers will make additional contributions to your 401(k) based on the amount of your own contributions. Matching can be done on a dollar-for-dollar basis, meaning that for every dollar you contribute to your account, they will add a dollar as well. It can also be done using a factor, such as ½, meaning they will contribute a dollar every time you contribute two. Continue reading...
What is a Keogh plan?
Keogh plans are any type of qualified plan at a sole proprietorship or partnership. Keogh plans come in various forms, and this is because they are actually quite a broad category. IRS Publication 560 (found here) divides workplace retirement plans into SIMPLE IRAs, SEP IRAs, and Qualified Plans. This last category, Qualified Plans, includes profit-sharing plans, 401(k)s, 403(b)s, money purchase plans, and defined benefit plans such as pensions and salary continuation plans. Continue reading...
How Can I Establish a Keogh Plan?
A Keogh plan will primarily need a plan document and a way to invest. A Keogh plan can be established by any self-employed individual of a sole proprietorship, partnership, and Limited Liability Company (LLC). A plan document must be put together by the sponsor, or the standard plan document from a prototype plan at a broker-dealer or trustee institution can be used. It is not necessary to submit the document to the IRS, but if you have any employees, it is required that you use this document and any other printed information necessary to fully explain and disclose their rights in regards to the plan. Continue reading...
What are Periodic Distributions from a 401(k)?
Periodic distribution is a planned intermittent payment of cash from a 401(k). If you choose to have your money distributed periodically, you will usually have a choice between monthly, quarterly, or even annual payments. Money distributed periodically is not subject to the same 20% withholding the lump-sum payment is. The periodic payments are treated as wages, and, because plan participants taking these payments in retirement may find it easy to calculate what their income will be for the year, they can instead plan for their actual tax bracket, or opt-out of withholding if they prefer. Continue reading...
What Role Does Inflation Play in my Retirement Planning?
Inflation plays a crucial role in your retirement planning. Investors should anticipate 2% - 3% inflation each year, meaning that the costs of goods and services rise substantially over time. Retirees should also consider that inflation is different for different items. For instance, health care has a higher rate of inflation each year than retail goods, and the cost of home improvements generally rises faster than the cost of food. Continue reading...
Can Something Happen to My Defined Benefit Plan?
The Pension Benefit Guaranty Corporation will insure benefits up to a point, but it may not replace the full value of a pension if a plan goes belly-up. While the Pension Benefit Guaranty Corporation (PBGC) insures thousands of Pensions across the country, the entire benefit of your Defined Benefit Plan is in no way guaranteed. Some corporations can “freeze” your pension, meaning they stop the counter on the number of years you’ve worked, and use that as the number to calculate your monthly payments. Many pensions today are struggling after the long period of low interest rates on fixed instruments like government bonds. Continue reading...
How Does the Money in My 401(k) Get Invested?
Employers sponsoring 401(k) plans are required to give employees the information and ability to manage their own accounts, using the investment options provided to them by the plan administrator and custodian. Sometimes employers and 401(k) custodians will provide employees with simplified systems by which to determine what kinds of investments appeal to them, and how they would like to allocate their portfolio in pursuit of their retirement goals. Continue reading...
How Does a 401(k) Compare With Other Retirement Plans?
There are several types of retirement plans that employers can provide, but 401(k)s are one of the most popular. Other employer-sponsored retirement plans include SIMPLEs, SEPs, and various kinds of defined benefit plans. SIMPLE IRAs are sometimes called SIMPLE 401(k)s, because they operate under the same laws as Safe Harbor 401(k)s. They both are primarily employee-funded, and have rigid standards for employer contributions. Continue reading...
How is a 457 Plan Different From a 401(k)?
A 457 is only slightly different than a 401(k), but the differences can be important. Although the two plans are similar in practice, there are some very important differences. Former employees can withdraw from their accounts penalty-free after they have separated from service, even if they are under 59 ½. 457 plans must also be offered to independent contractors, which 401(k)s do not. 457 plans are offered to state and local public workers and employees of certain nonprofits.Top-hat 457 plans can also be offered to highly compensated employees without being offered to other employees, at both non-profit and for-profit businesses. Continue reading...
What Happens If I Withdraw Money From my Cash-Balance Plan After I Retire?
You may not be able to make non-recurring withdrawals of various amounts from a Cash Balance plan. After you retire, you’ll typically have two options: a fixed monthly payment for the rest of your life, or a lump-sum payment. Cash balance plans generally do not allow random, non-recurring withdrawals because the individual account was always a hypothetical account. The administrative work of fetching various sums for everyone and keeping up with the total pool of plan assets is not the administrator’s prerogative with these plans. Continue reading...
What is AARP?
One of the largest and most influential groups in the country is the American Association of Retired Persons, or AARP. It is a nonprofit organization whose mission is the improvement of the quality of life for its members. The group is one of the largest entities in the country, and it’s free monthly magazine has a higher circulation than any other publication in the United States. Its membership consists of over 40 million American citizens over the age of 50. Members receive many benefits each year, including many discounts and coupons on food, lodging, travel, and so on, for dues around $20 per person per year. Continue reading...
What are the Vesting Rules for My Self-Employed 401(k)?
There is no vesting required for self-employed 401(k) (aka Solo K) plans, since you are the employer and the employee. Vesting is a process in which assets that were completely owned by one party are eventually made the property of another party who has had use of the assets. In retirement plans, employer contributions typically have a vesting schedule, partially to give employees a reason to stick around for a few more years. Continue reading...
Can I Take Loans Against My 401(k)?
401(k) plans typically allow loans to be taken, so that investors don’t have to pay taxes or an early-withdrawal penalty on the money. Many 401(k) plans allow loans to be taken out on the account balance, up to certain limits, and on a strict repayment schedule. Most plans require loans to be repaid in under two years, but they can give participants up to 5 years to repay a loan. Taking money out as a loan allows participants to avoid early withdrawal penalties and taxes. If the loan is not repaid on-time, it can be treated as a distribution, however, which might cause the investor to incur taxes. Investors usually don’t fully realize the damage that loans (and early withdrawals) can do to the long-term account balance. Continue reading...
How Can I Establish a SEP IRA?
SEP IRAs do not have to be established until taxes are filed for the year, and it can be done quickly. SEP IRAs require very little paperwork or trouble to establish. One form will notify the IRS that SEP contributions are being made for the year, and the amount. The only other documentation needed is a plan document, which establishes and outlines the eligibility rules for a particular plan, but this document only has to be kept on file at the business, and does not have to be submitted to the IRS or any regulatory authority. Continue reading...
Who Administers a 401(k)?
A 401(k) plan Administrator will usually be an officer of the Employer sponsoring the plan. A 401(k) plan document will specify who is the Administrator of the plan, but it is generally an executive or officer of the company sponsoring the plan. 401(k)s can be sold in packages that are essentially the same from employer to employer. When the design is well-established, and there are systems in place to enroll employees and maintain the plan, such as an employee website, a company’s CFO or human resources department chair may wear the Administrator hat. Some plans require a special administrator, and this may be a requirement of the broker-dealer acting as Custodian, especially if the plan has been designed from an open architecture, and there are many moving parts. Continue reading...
What Happens If I Withdraw Money From My Cash-Balance Plan Before I Retire?
In general, this won’t even be an option for many. Cash balance plans do not permit partial withdrawals. If you have separated from service at the employer, you can take your entire vested amount with you. You can cash out your balance and pay income taxes on it, as well as a 10% IRS penalty if you’re younger than 59 ½. This penalty may also be avoided if you separated a from service after age 55; these rules are the same for 401(k)s and other qualified plans. Continue reading...