401(k)

What is it? A tax-deferred investment and savings plan that acts as a personal pension fund for employees. (The name refers to the relevant section in the tax code.) This plan lets you defer taxes on a portion of your salary until you retire. In 1999 an employee can contribute up to $10,000. In subsequent years the contribution limit will be adjusted for inflation. You pay taxes on your investment gains when you withdraw money from the plan, which you can begin doing without penalty at age 59?. When you leave a company, you can roll over funds into your new employer?s 401(k) or into an IRA. You must start withdrawing funds after age 70?. Part of what makes this plan such a powerful retirement vehicle is that many employers match employee contributions, usually in the range of 15% to 50%. Plan participants usually have a choice of investments, including stocks, bonds, and fixed income funds. Some employers restrict investments to their own company?s stock. Many 401(k) plans allow you to borrow from your nest egg. Generally, you must pay back the loan within five years, but you may owe a 10% penalty and taxes if you haven?t paid the money back when you leave the company. The law allows you to make early withdrawals in certain cases of economic hardship, but you will get caught by the 10% penalty unless you are disabled, you leave your company at age 55 or later, or you need the money for medical expenses exceeding 7.5% of your adjusted gross income.

Added By: Kaitlyn

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