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Greetings everyone! In this week's article, I will be answering a question sent in to me by "KT", who asks me about 401K's โดย Joey

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Because there are so many requirements and rules regarding 401K’s and each may not apply to everyone, I will only go over the general basics. For more detailed information, please contact the IRS, either through their local office or via their website at http://www.irs.gov/Retirement-Plans/401(k)-Resource-Guide, or talk to your retirement agent for more information.

401(K) RETIREMENT PLANS

Q: What is a 401K?

A: A 401K is a long term savings plan that is used to accumulate money towards retirement. The 401K is named after the section of the US Internal Revenue code that allow this particular financial plan. These plans are typically only sponsored by an employer/company; the employer/company allows the employee to contribute a portion of the money from their pay check (with annual contribution limits*), to be deposited and saved in this retirement account. Depending on the specifications of your setup, there are different type of investments available, including but not limited to mutual funds, stocks, bonds, money market instruments (both short and long term). The benefit of having a 401K retirement plan is that the money contributed is tax deductible, and any investment growth of the account is tax-deferred. Tax-deferred means this saved income is not taxable until you withdraw it at the age of 65 or more.  (Note: Annual Contribution Limits. The maximum pre-tax amount an employee can contribute to the plan varies by year. For 2015, the maximum 401K contribution limit allowed by the IRS is $18,000.  This is an increase of $500 from last years $17,500 limit).

Q: Can you withdraw money from your 401K plan?

A: You can withdraw money, but I wouldn’t advise it unless it is the last resort and you really need it. The reason why you don’t want to withdraw from your 401K is because it is a retirement account and there are penalties that could happen if you withdraw early. For example, most early withdrawals (those taken before age 59 1/2) from a 401K are taxed as ordinary income, plus there is a 10% penalty fee or more. The exceptions include disability, a layoff after age 55, a qualified domestic relations order after a divorce, or death. But not only do you lose a good chunk of your savings to taxes and fees, you also lose that potential future savings growth. If you really are in need of money, consider borrowing from your 401K instead of an early withdrawal. For this, you’ll have to consult your employer and/or review your 401K documents to see if borrowing is allowed.  If it is, then this might be a better option for you.

 

I hope these answers provide you with more insight.  Please feel free to contact my office so that we can assist you if you have any further questions. As always, if you have any questions you would like to be answered in future articles, please email me at: This email address is being protected from spambots. You need JavaScript enabled to view it. or check out this and other topics on my website at: WWW.JC4LAW.COM

Disclaimer: The information contained herein have been prepared for informational purposes only and are not to be considered legal advice unless otherwise specified. If you have a specific question regarding your personal case, please contact the Law Offices of Joseph Chitmongran for a full consultation.