The 401(k) plan is a retirement savings account available to certain for-profit and nonprofit private employers in the United States, Canada, or the United Kingdom. The plan is named after the section of the United States tax code that first authorized it. The 401(k) plan permits eligible employees to set aside a certain amount of pre-tax income from each paycheck to be accumulated in a retirement account. This money is generally invested in various securities, such as stocks, bonds, and mutual funds.
Table of Contents
- What is a 401(k) Plan?
- How Does a 401(k) Work?
- What are the Benefits of a 401k?
- 401(k) Plan Rollover Rules & Restrictions
- Choosing Investments in Your 401(k)
- Types of Gold Investments Eligible For Inclusion in a 401(k) Plan
- How Much Should I Be Putting into My 401k?
- Advantages of Rolling Over a 401(k) Plan to a Precious Metals IRA
What is a 401(k) Plan?
A 401(k) plan is a savings plan for employees. In this plan, the employer puts aside a certain amount of money. Either from the company’s profit or as an expense. The plan is administered by a professional called the “plan administrator.” In most plans, most of the money in the plan is contributed by the employer. While employees, including their employers, contribute some. Other contributions include life insurance premiums or past wages refunds. Employee contributions have been rising due to the increased importance of 401(k) plans in wage negotiations.
How Does a 401(k) Work?
You are eligible for a 401(k) if you are enrolled for at least one hour in a class on the job you have for at least one month, and your employer (usually) offers this plan.
Other eligibility requirements vary from company to company. Still, in general, a worker must have contributed to the plan for a minimum (e.g., three years with one time six months is the minimum) and must have earned a minimum amount of money. After this time, it is expected that one can contribute a limited amount (such as $500) or be involved in the general investing of the plan, rather than making specific choices for oneself.
How Do You Get A 401(k)?
You can get one in a few different ways. If you are starting a new company job, the most common way is to pay your employer a one-time enrollment fee and receive an all-expense-paid trip to your company’s 401(k) plan administrator’s office. If you are working for your company full time, it is typically automatic; but they must request it if it is a student worker. Sometimes, as with some nursing jobs, it is offered, but the employee must opt into it.
How Do 401(k) Contributions Work?
Once in, you can start making contributions (most plans allow up to about $2,000 a year, with most plans allowing a total of $12,000 contributions if you are 50 years old today). Your employer matches this amount, defined as one percent of your compensation. So if you make a $50,000 a year wage, your company will put an additional $1,500 into your account every year. This is an excellent benefit for many people since, despite the awful returns on the market from 2002 to mid-2007, most 401(k) plans still end up outperforming any comparable investment. When this happens, you have made contributions as well as earnings on your donations. The beauty of 401(k) plans is that you can usually withdraw money from your account before you retire, with a few exceptions, such as not taking funds out of the military plan.
How Do Employer 401(k) Matching Contributions Work?
This is where you can earn money. Not only do your company match the funds you put in, but they contribute as well. It may be that in your company’s eyes, you are a “key employee” or other designation that entitles you to employer matching, why some will match dollar for dollar up to a percentage of your salary!
The reason why some workers are just willing to do anything their company asks of them, even if it costs the company far less than a typical employee. In exchange for this benefit (which also shows up in your paycheck as an ” Improvement Allowance “), you agree to remain with the company for a set period (typically four to five years). This agreement can extend if both sides agree, but either side can end it at some point.
What are the Benefits of a 401k?
The most obvious benefit is that it allows you to save for your future if you can do so tax-efficiently. The second benefit is that it tends to attract higher qualified clients and lower unqualified ones (couldn’t find full-time work) because it’s an easy way for businesses to attract top talent.
401k Employer Match
Contributions are pre-tax dollars; the employer owes no taxes on this money. This means that the more you earn, the more money you put into your 401k plan. The money grows tax-deferred until you withdraw it (can only make a withdrawal with after-tax dollars), and over that time, it should grow quite large.
Finally, 401k plans are great for attracting good talent since it’s an easy way for companies to “buy” top talent.
401k Tax Breaks
The money that your employer contributed to your 401(k) plan is pre-tax money. As a result, not only is this money-free money for you throughout the year (because you don’t have to pay taxes on it now), but during employer contribution years, you get to keep all of it and owe no taxes on it at all.
Year: 1 – Your salary is $50,000 a year. Your employer contributes $2,000 pre-tax to your 401k plan. You don’t have to pay any taxes on this money.
Year: 2 – You’ve increased your salary to $55,000 a year. Because of this increase, your employer decides to increase their contributions to $5,000 pre-tax automatically from their contributions. You don’t have to do anything! The company will continue to contribute $5,000 pre-tax into your 401k plan each year. This is a no-brainer for your employer since it’s free money that doesn’t even require them to do anything (they also don’t have to report this money to the IRS on their annual 1040 tax return).
Year: 5 – You’ve decided to retire. That’s ok; you’ve been growing increasingly bored anyway. Your employer, of course, is sad to see you go but relieved as well. You’ve worked for this company for over 25 years, and no company wants to see a familiar face leave their company in the twilight zone that is retirement.
Upon your retirement from this company, you can able to take all the pre-tax money that has been set aside in your 401k account for you. You can also take out a loan against this account (up to 50% of the account balance) with the only stipulation that you still must be employed with the company that provides the 401k plan to pay off the loan.
401k Shelter From Creditors
If you have a 401k plan, you have access to free legal representation, whether you know it or not. This is because the money in your 401(k) grows tax-deferred. Deferral of taxes is why you get a check from your employer each year for “your” contribution and why it takes so long (if ever) for you to pay any taxes on that money.
This free legal protection does have its limitations, though. While your 401k contributions are tax-deferred, the earnings on this money grow tax-free and “sheltered” inside your 401k plan until you withdraw it. It is only after you withdraw this money that you will be taxed on the money you earn, plus a 10% penalty tax if you’re under 59.5 (the amount of time your retirement contributions remain tax-deferred). If you put away enough money before you retire, this 10% penalty doesn’t apply.
This tax shelter can be helpful, and your employer is probably charging you enough for your monthly salary that you’d be a fool to turn it down, but there is a catch. Your company must also allow you to take the money out of your 401k plan penalty-free in the first place. This is usually only the case with large companies with big HR departments and annual review processes. Even then, some companies have a minimum age requirement (which has started to become more flexible over time but not to the point of saying you can take the money out penalty-free at age 70 even if you’re only in your thirties).
If you find that you’re considering quitting your job for whatever reason, you can’t get just liquidity all of your 401k penalty-free. You’re still subjecting yourself to ordinary income tax and social security tax on the amount. This is why it’s always a good idea to have some sort of savings outside of your 401k plan (that your employer doesn’t have access to). If you need money right away and don’t have other savings, consider taking out a loan from a credit union or personal loan company. These companies at least don’t see your salary as part of their revenue stream, so they don’t have a reason to illiquidity your account if they can help it.
401(k) Plan Rollover Rules & Restrictions
Suppose your old company goes out of business or begins paying their employees through a portal that doesn’t accept American credit cards. In that case, you should immediately transfer all of your money in your 401(k) to your new company’s 401k at the old company. This is because only your old company is legally allowed to roll over funds into this plan. As soon as you begin making contributions to another 401k, that plan takes over as the “old plan,” and all future allocations into that plan will cease.
If you change jobs before you take outgoing from your 401(k), then this choice is up to your new company how they want to handle things. Some 401(k) plans will accept the transfer as is, others require that the funds be transferred within a limited time frame, and others cannot get the transfer at all. It’s essential to research your choices on the internet or ask human resources about the specifics of your plan’s rules.
Because of the change in plans, what was supposed to be a way to defer taxes is now going to incur a 10% early withdrawal penalty on your regular income taxes if you take the money out before age 59 1/2 (whether you use the funds or not). If you leave your job and do not have enough in your 401(k) to cover the tax liability, this is also why you should not go more than your Nationwide in the account. If this is true, you might be able to receive a refund from the government of the excess amount that contributed to your account if you request it within three years of leaving your job.
Although you will no longer receive an employer match on your 401(k) contributions after you leave your job, you can still make after-tax 401(k) contributions. If you’re close to retirement age, this might make more sense whether you’re still working or not (as opposed to taking additional early retirement savings that are taxable). As with any investment, your money is at risk, and you should consult a professional before making any financial decisions.
Your take-home pay will increase enough from all this that you might want to start saving in an IRA, also known as an individual retirement account. If you’re already close to retirement, this might be a good idea if your company’s matching program isn’t the best and you don’t qualify for the 401k match from your new job. As with all investment choices, your money is at risk.
Choosing Investments in Your 401(k)
The investments you make in your 401(k) will significantly impact your future retirement savings. Your employer may coordinate the fund held at their institution, or they may allow you to choose from a few funds that are offered as options in the 401(k). These funds usually hold various investments such as stocks, bonds, mutual funds, etc., which can be invested to achieve your investment goals.
Investments are not always risk-free, as even the safest investments can lose value. An individual fund may experience poor management, or it may be a victim of a market downturn. Additionally, taxation has always been a potential risk.
Usually, funds that invest in stocks are at a higher risk than those that invest in less volatile bonds, but they are also typically more profitable in the long term.
To lower risk, you can split your money between several stock funds and fewer bond funds, or vice versa. For all decisions, this is an investment of risk and requires that you understand the nature of your investment choices.
It may be beneficial to consult with a financial advisor before making any investment decisions, especially if you are particularly attached to a particular investment.
Your contributions are “managed” for you, and you will only get the profit regardless of what happens. The government has set up restrictions on how much you can invest in each fund. And these are referred to as your “budgets.” If your funds fall below your budget, you will not be able to make extra contributions.
Types of Gold Investments Eligible For Inclusion in a 401(k) Plan
- Bullion Bars: Pieces of gold that are refined so they are as close to perfect in weight, purity, and appearance as possible.
- Gold Coins: Coins that the government has minted, the gold they contain is over 99.9% pure.
- Gold Bullion: Refined gold in ingot, coin, or bar form.
- Gold Options: Gold futures contracts for delivery at a specific price on a set date in the future.
- Gold stocks: The stocks are the companies that deal in gold, including mining companies and those that refine it, such as smelters and finishers.
- Gold futures: Contracts for purchasing a certain amount of gold at a future date and a price set today.
How Much Should I Be Putting into My 401k?
You have up to $49,000 in annual 401(k) contributions ($25,000 if you are 50 or older). The IRS sets the annual maximum. You can make additional contributions as long as the total does not exceed your total annual compensation, including profit sharing if any.
In addition to these annual maximums, you must contribute at least 10% of your monthly payment, which is pre-tax. Although your employer may match some or all of your contributions, you must still satisfy this minimum requirement.
Include all of these in your total compensation when you figure the maximum you can contribute. For example, if you are paid monthly, the maximum annual amount you can contribute is $49,000*12 = $585,000 (assuming you make maximum contributions for all years). Any amount above this is a profit for you and not counted in your annual contribution.
Advantages of Rolling Over a 401(k) Plan to a Precious Metals IRA
If you choose this option, any 401(k) plan contributions you make to your new account will be tax-free as the funds will be rolled over. You will be able to choose between a traditional IRA and a Precious Metals IRA. The funds will be invested in either US Treasury bills backed by the US government or in Precious Metals, such as gold, silver, or platinum bullion.
If you own common stock in a company, these are generally traded on a national or regional exchange and can provide a good steady income source.
Bullion and platinum are traded 24 hours a day (at least for the rest of the day you buy). You probably won’t see the value of your standard stock change much throughout the trading day. For that matter, you probably won’t know what the company does or any reason behind its success or failure. You do not have a vote. Therefore you do not have a responsibility to support the company.
Precious Metals are traded more quietly on the NYM (New York Mercantile Exchange: NYMEX) or a smaller, regional exchange. Bullion dealers must file regular reports with local, state, and national law enforcement for any investigation into their operations. Buying common stock in a company requires only your time. Purchasing precious metals requires your time and, most likely, some knowledge about where to look for financial reports, even if they are online.
The 401(k) Plan exception can be used to invest in precious metals over the long term, but it is a good idea to learn more about the common stock to understand why the company is doing well or failing. If your employer allows this, you can borrow funds from 401(k) Plans to roll over into your new account. Keep records of all trades and make profit and loss statements for your precious metals and common stock accounts. Keep an eye on your 401(k) Plan statement and your monthly pay stubs for this account. The statements will tell if you’re meeting the minimum contribution, what your total account balance is at any time and the current earning capacity of the account.