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401(k) Retirement Plan

A 401(k) is an employer sponsored retirement plan designed to provide tax advantages on an employee's retirement savings. 401(k) plans must be sponsored by an employer who acts as a fiduciary for the account. The employer, which is usually a corporation, is responsible for the establishment of the plan and for the selection of plan investments. Once the plan has been established, the employee defers a portion of his/her annual salary into the fund.

In a participant-directed plan the employee selects from several investment options. Meanwhile, in a trustee-directed 401(k) the employer appointed trustees who in turn determine the plan's investment strategy. The first 401(k) plan, which was established in 1980, was named after a section of the Internal Revenue Code.

ERISA
401(k)’s are tax-qualified plans covered by the Employee Retirement Income Security Act of 1974 (ERISA). This act stipulates that 401(k) assets are protected from creditors. Other types of defined contribution retirement plans include 403(b) plans, which cover workers in non-profit organizations, and 457 plans, which cover local and state government employees.

Contributions
Contribution limits for 401k plans increased to $13,000 per year in 2004, up from a limit of $12,000 in 2003. The current law governing 401k plans--the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)--provides for increases in the annual limit to match cost-of-living increases. Specifically, the limitations are set to grow by $1,000 per year until 2006, when the contribution limit will reach $15,000.

For more details on 401k maximum contributions and related retirement plans, please visit the following link:
http://www.irs.gov/irb/2003-45_IRB/ar13.html

Taxes and Distributions
Taxes on 401(k) plan contributions and earnings are deferred until the plan owner takes a distribution from the plan. When money is withdrawn it is taxed as regular income. Withdrawals are typically made at or after the plan owner has reached the age 59 1/2. If the plan owner withdraws money from the account prior to retirement age, then he/she will incur a 10% penalty payable to the IRS (unless specific circumstances apply).

Loans
Many plans also allow employees to take loans from their 401(k) plans. When these loans are repaid, the funds then become part of the 401(k) balance.

Q and A:

1.  Can a 401(k) be rolled into an IRA?

Yes. A 401(k) can be rolled into an IRA when the participant:

  • Is no longer working for the organization
  • Retires
  • Becomes disabled
  • Dies

2.  What are the options for a 401(k) plan when changing jobs?

  • Transfer the 401(k) plan assets into your new employer's 401(k) plan.
  • Roll the 401(k) plan assets to a Rollover IRA
  • You can leave the 401(k) where it is, especially if you like your investment choices. However, if the balance is below $5,000, then some employers will require the plan participant to rollover the money.
  • 401k(b) assets cannot be rolled into a 403(b) and vice versa.

3.  When can 401(k) money be withdrawn without penalty?

A plan participant can withdraw penalty-free distributions from a 401(k) as long as one of the following conditions applies:

  • Reaches age 59 ½.
  • Separates from service in order to retire.
  • Becomes disabled.
  • Through a loan (some companies will not allow this).
  • Suffers financial hardship.
  • Dies.



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