Understanding a 401k Retirement Plan for Your Employees
April 1, 2018
Depending on the age of your employees, they might not be familiar with a 401k retirement plan. What’s more, you might be among the crowd of the uninformed yourself. We can help you understand just what kind of retirement plans are available to your employees.
How Did the 401k Originate?
One of the first things to know about a 401k is where the name came from, which is the portion of the tax code that manages it.
The retirement plan was meant to act as a type of supplement for regular pension funds. The shift was due to the fact that it gradually became more expensive to manage pension plans, leaving companies looking for alternatives. Hence the birth of 401ks.
Why Should Your Employees Opt for 401k Plans?
Some employees might not be totally convinced that a 401k plan is the best use of their hard-earned money, especially younger employees who are decades away from retiring.
One of the first things to share with them is that when it comes to retiring, starting earlier is both better and easier. Starting to put aside money for retirement early on allows money to grow over time, which can provide a great deal of comfort and peace of mind when a person nears the age of retirement.
In addition, some social programs, like Social Security, might not be available in the coming years, meaning people will have to financially fend for themselves when they get older.
How Does a 401k Plan Work?
With this type of retirement plan, employees can manage how their contributions are handled.
In most cases, the plan includes several mutual funds made up of a combination of bonds, money market investments, and stocks. Employees invest a specified percentage of their paychecks into their plan before that percentage is taxed. It’s not until the money is withdrawn from the plan that it’s taxed.
An important distinction to make to your employees is that 401k plans are not the same as mutual funds, stocks, or index funds. Instead, a retirement account acts as a holder for actual investments.
Limitations on Contributions
There are limits to how much employees can contribute to this particular retirement plan, and that limit can change from year to year. Older employees who are at least 50 years old are legally allowed to make catch-up contributions if they so choose. There are also employer/employee joint contribution limits.
What Employees Should Be Aware Of
For all its benefits, you and your employees should be aware of a few potential landmines when it comes to 401ks.
Employees should know that the money they contribute to their plans is not available for immediate withdrawal, meaning they should carefully budget how much they have withdrawn from their checks.
Contributors also have to remain employed with a company for a specific amount of time before they can take advantage of any company contributions to their retirement plan.
Even if an employee waits until the right time to access funds, she or he should know about the financial penalties attached to accessing funds before they reach the age of retirement.
Sometimes employees run into financial problems that involve liens and the IRS. 401ks are protected from judgment creditors, which means account holders do not have to worry about their contributions being siphoned if they have back taxes to pay. The retirement accounts belong to the employer rather than the person contributing to them.
That being said, it’s still best that employees read over this particular section of their 401k paperwork to get a full understanding of the type of protections they have.
Making Contributions for a Lifetime
There are some retirement accounts that have limits on how long employees can contribute, some cutting contributions off at the age of 70. Such limitations don’t apply to 401k plans. As long as a person is working, she or he can make contributions.
Rolling Over a 401k
Employees don’t have to remain with a company in order to keep their retirement plan. Anyone leaving a company where he or she has a retirement account can choose to leave the money where it is so it can keep growing, or, it it’s an option, they can open up a brand new account with the new company.
They can also rollover their 401k account. What this does is transfer the money in the account over into a rollover IRA, which is another type of retirement account. Once the money is in the rollover IRA, it will continue to grow just as it would had it been left with the former employer.
Besides traditional 401ks, there are also Roth 401ks. Unlike the standard variety, Roth retirement accounts include contributions made with after-tax funds.
When withdrawals are made, the account holder doesn’t have to pay taxes on them, but initial contributions are taxed.
A person might want to choose this type of retirement account if there’s a chance she or he might be in a higher tax bracket upon retiring.
There are no income limits on Roth 401ks, making them a solid option for higher earners.
Human resource managers, business owners, and payroll managers alike should make themselves well-educated on the ins and outs of a 401k retirement plan. To talk about feasibility, potential business concerns, and if we’re the right fit for your company, don’t hesitate to reach out to us here at USA Payroll by filling out and submitting a Contact Us form.