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A 401k plan can help with retirement.

What to Know About 401(k) Plans

What is a 401(k) Plan?

What is a 401(k) plan? In short, it is a savings plan put forth by an employer. Before deciding to use a 401(k) plan, make sure you do some research and talk to your financial adviser to make sure it is the right option for you.

Facts About 401(k) Plans

401(k) plans are not free. Typically, fees could swallow as much as 30% of a 401(k) by the time retirement is reached. Due to recent changes in regulations covering fee disclosures, employers receive details on the fees associated with running their 401(k) plan and you can get those details from your company’s benefits manager.

There are many online option tools for 401(k) plans. It is advised to take your time going through the steps with the results being a “complete professionally designed portfolio” for you based on the style of investing you are comfortable with.

You Can Withdraw Earlier Than You Think

If you decide to leave your employer between the ages of 55 to 59, you will not be assessed for the 10% penalty tax. This is a neat little stipulation that permits you to take withdrawals that are free from the penalty tax without having to use the substantially equal payment provision. There is a caveat though. You cannot have rolled your fund from a 401(k) to an IRA. If you do, the age 55 penalty-free withdrawal provision no longer applies.

401(k) Plans Are Protected From Creditors

By law, if you get into trouble financially (if your house is foreclosed on, or you declare bankruptcy) your creditors cannot go after your 401(k) investment fund. Therefore, it is not a wise decision to use your 401(k) for anything other than what it is meant for, a retirement fund.

Becoming Fully Vested Usually Takes Time

You do not get to keep contributions made by your employer until you are fully vested in the company’s retirement plan. Only about 45% of plans allow participants to become fully vested right away while many employers only allow employees to keep any of the matching funds after they have been with the company for a specified number of years.

When You Can Start Using The Fund’s Money Tax-Free

Once you turn 70, you are required to take distributions from your 401(k) annually. The first withdrawal must be made by the beginning of April the year after you turn 70. Withdrawals after that need to be taken by the end of December of each subsequent year. If you fail to take the correct amount, you will incur a tax penalty on the amount you should have taken. There is an allowance for people who are still working after 70. Check with your financial adviser to see what those rules are.

You Need to Read Your Plan Carefully

The benefits department of your company will give you your 401(k) documents. Make sure you read them thoroughly so you know what options you have. These options include hardship, loans, rules about moving money around, vesting and schedules. If you do not understand the documents, ask a financial adviser to help you (most larger banks offer this service to their customers).

What Are ESOPs?

You may be receiving corporate stock as a bonus or you might want to simply be a good employee and invest in the company you work for and believe in. That is great, but having too much stock of one company in your portfolio is like having the proverbial monkey on your back. What happens if the company goes belly up? You need to ask yourself if you want your future dependent upon what happens with one company.

The Tax Breaks Are Immediate

Since what you contribute comes out of your paycheck before taxes are withheld, you get tax-deferred growth. You will not get taxed each year on any capital gains, dividends and other types of distributions.

You Can Catch up on Contributions

If you did not contribute to a 401(k) when you were younger and you want to play catch up now that you can see retirement over the horizon, if you are over the age of 50 you can contribute an additional $6,000 to the federal limit, which has been raised to $18,000.

Tools for Asset Allocation

When considering how to allocate your funds, the two key factors to take into account are how many years you have before you intend to retire and more importantly, how much risk you can tolerate. There is a great tool that could help you figure out where you should be: CNN Money’s Fix Your Mix Asset Allocator.

Most Americans are counting on their 401(k) plan to fund their retirement along with their social security income, so the earlier you start saving, the more you will be able to realize your dreams when you do decide to retire.