Making Contributions to a 401k

It is important to make contributions of the right size to your 401k plan in order to ensure that you will have a comfortable income during your retirement. There is a maximum limit that you can contribute to your 401k in a particular year. The limit in 2008 was 15,500 dollars, from example. Any matched contributions that are made by your employer do not count towards this limit.

Traditionally, it was considered a good idea to save 10 percent of your income, but it is now probably wiser to save 15 percent. This will protect you against decreases in the strength of the dollar, reductions in social security and the fact that you are unlikely to have any other pension. Aiming for a minimum of 15 percent will help you to enjoy a comfortable retirement despite these problems.

Many employers offer matched contributions, which are an excellent way of increasing your pension. The contribution is usually a percentage of your salary, which will be paid into your 401k by your employer every year, as long as you make a contribution of at least the same amount. Since it is paid into the 401k, you will not be required to pay tax on this money until you begin to make withdrawals.

As well as paying money into your 401k, it is possible to withdraw money, although it is inadvisable to take anything out early unless you have no other options. Once you turn 59 and a half, you will be able to withdraw a lump sum and pay a 20 percent withholding tax.

Alternatively, you can begin to receive retirement distributions, that also have a tax of 20 percent. You may also choose to leave the money alone. Once you reach 70 years of age, however, you will be obliged to start receiving the minimum retirement distributions. You may be able to place your withdrawn money into an IRA, another form of account on which tax is deferred.

If you need to withdraw money earlier than this, it will cost you. You may be able to withdraw some of your money early or to take out a loan against the 401k. In order to take out money early, you may need to qualify on the grounds of hardship. Examples of situations in which you may be able to make an early withdrawal are foreclosure, permanent disability or the need to pay medical bills. If you withdraw from your 401k because of hardship, you will have to pay a 10 percent tax penalty in addition to your usual tax rate. If you have a Roth 401k, you will avoid taxes and penalties when making an early withdrawal, but it will still cost you if you take money out early. Early withdrawals should be avoided if possible.

Related posts:

1. The 401k Employee Retirement Plan
2. How You Benefit From a 401k
3. Discrimination Testing for 401k Retirement Plans
4. Tips for Employee Retirement Plans
5. The History of the 401k

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