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401 K plan is a retirement plan that is on offer in US & some other countries. There is more. This plan offers tax deferred savings to the employees & encourages them to save for retirement. It’s also referred to as employer sponsored retirement plan.

A 401 K plan offers many tax deduction benefits to the employees. There is more. These benefits can be availed by all citizens (except in certain cases where the employer can impose certain restrictions). In cases of people with less than 1 year of service, non US citizens or part time workers, contributions to a 401 K plan depends upon the employer. For others the rules are common.

401 K plan offers tax deductions to the contributors. Under this plan all the contributions are tax deductible, that is, tax isn’t levied on the contributions. Even though contributions are made from non taxed salary, it’s not entirely exempted from taxation. The funds (or tax deductions) are taxed at prevalent rates at the time of withdrawal. For this reason the savings are only tax deferred & not tax exempted.

401 K funds (or the tax deductions) are generally monitored by a third party. The annual contributions can be invested in a variety of stocks, funds, certificates & bonds. But it’s up to the employer to provide these options to his/her employees. He has the sole discretionary power over the management of 401 K plan. The contributions to the plan can be matched by the employer also. He/she can contribute to the 401 K plan of his/her employees. There is more. This is generally done by the employers to retain the employees. Employer contributions are not included in the maximum limit on annual contributions of employees. For this reason they’re over & above the salary of an employee.

The employer can provide the option of purchasing company stocks from these annual contributions. But investing the entire in amount in a single companies stocks, specially the one in which one is working, isn’t advisable. This would mean unnecessary risk & therefore should be avoided.

Usually this plan is offered by big companies only. This is because of the enormous costs involved in the administration of the plan. However, simpler options are available for self employed & former government entities also.

The maximum tax deductions possible are limited & set by the government. The employer can also impose his/her own limits for maximum employee contribution (or tax deductions). For example a firm may restrict the maximum contribution to ten percent of the employees income. The governmental limit on maximum contribution generally depends on the inflation rate & varies every year. For people over 50 years of age, catch up limits are allowed. This allows people over 50 years to contribute more than others. For the year 2007, the maximum contribution limit for people below 50 years of age was $15,000. For people above 50 years of age this limit was set at $15,500.

Tommy Jackson owns & operates
http://www.a1retirementresources.com
Individual Retirement Account

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