401K PLANS

401(k) plans, a word that rings melodious bell in the ears of so many. These are the kind of incentives that usually so many of us employees are looking forward for. It almost like getting to be a millionaire on the employers money. Also, the thought about having to pay low income tax does cause a rise in the ecstasy levels.
And the best part is, this is the money where in you don’t have to worry about where to deposit, how to increase the savings. Retirement does not cause your brows to frown; it is one pleasant phase for which you actually look forward for.
Usually 10 years investment, begin at 25 and you have a million or two by you retire


But how did this plan ever come into being. Where did it all begin??? The year was 1978, and the importance of having enough funds when a person retires was understood well in depth. It was during this, that the Congress cam up with a scheme for the benefit of the country, the citizens and even the employer. This was plan that funded many projects, it lowered the income tax, and at the end of it all gave you a treasure. The very name 401(K) plan also came up from the Internal Revenue Code Journal. Where all the details about this scheme are mentioned in section 401 and paragraph (k).
While this scheme was being talked of during the initial stages of its being introduced, a benefit consultant Ted Benna came up with his plan and this was the one that was officially accepted and put to use. This was in the early 1980s. But it was only in the early 90s that the final set of rules and regulations came up, thus it was almost a decade for the 401(k) plan to get fully fledged.


Today in layman terms, we know when we talk about Family Retirement Plans, we are talking about 401(k) plans, when we are talking about Defined Contribution plans, and we are talking about 401(k) plans.


Well as on date there are so many companies who have so much to offer when we talk about retirement, but the fact, this is the plan, which gives the employee the freedom to instruct the employer as to what is the amount he wants the employer to put in from his income is what makes it so unique and so different. But however, IRS does watch this point of action and has a set of rules that put up an upper limit as to how much amount goes into the plan.


Now what is the strategy that is employed in making this plan work is a simple logic. The amount that goes in the plan is first deducted, then the remaining amount is taxed, and thus the employee thus lands up paying fewer taxes. Let us imagine that Albert Einstein get about $ 6000 as his income, and wants to put in $1500 in the plan. So the income for the month will be $4500. Now IRS will deduct taxes at 28% or whatever plan you fall into, thus you get to take home $3240. Had Albert Einstein not gone in for this plan, then he would be taking home $4320, but here the amount that is available is $3240+$1500 that makes it $4640, thus only improves your savings
But what happens to the money that we put in the plan, usually it is lent to a group who are into bonds, mutual funds etc. Usually a list of investment methodologies are always provided, and it is definitely for an individual to make up his mind as to what does he want to do.


But what happens if you want to withdraw your money before it could ripen or mature, well, you pay a fine to the IRS, and also tax on the amount.

Well all this makes it sound that it indeed the most ideal plan, but when it comes to safety, what is it that makes this plan a sure shot success. Well ERSIA that is the Employment Retirement Income Security Act that was passed in 1974 does make sure that your money is held in custodial accounts, thus making safe and helping it grow. So no matter what your employer may claim, if he is to declare bankruptcy, you are in safe hands with 401(k)


The ERSIA makes the employer update the employee on account balances, asks the employer to make conditions for easy operation of the account by the employee, asks the employer to update the information databank on various information scheme available.
It also sets requirements that your employer must follow, such as sending you regular account statements, providing easy access to your account, and maintaining compliance so that the plan is fair for everyone in the company. It also requires your employer to provide you with educational materials about the investment opportunities within your plan.


Many a times we also come across a term called VESTING. Here the employer has a schedule lined up, after the schedules time frame, the money is given back to the employee, and any future investments that he may want to look into would be totally his. Also, some plans are flexible enough that allows you to borrow money from your account, but of course the constraint here would be that you need to pay an interest. But it is fair, since instead of paying to the lender, here you yourself are the lender and thus the money again goes into your pocket.


Now one major question that arises is what happens when you decide to quit your job, what then happens to your funds? Again here, the solutions are very simple you can transfer the money into your new employer’s 401K plans or still continue with your old employer’s plan, or IRA. But unless you plan to make a change to IRA or to the new employer’s fund, one must make sure that the cheque is not drawn on your name.
Else, you will land up paying both tax and fine.


Well with all this knowledge it is equally important to know, how much of your salary would you want to invest in this plan. Now this is basically a one on one priority of each individual. It depends on the circumstances that you are living in. What are your financial responsibilities? What is the back up you have for financial crisis or emergencies? And many more, but once you are able to conclude that a certain x figure is always safe, then a percentage of that income can definitely go into the 401K plan. And you can always increase your funds in the plans, whenever you get a raise etc.


Now comes another factor of deciding where you want your hard earned bread to go into, whether it is the stock market, bonds, stable accounts etc. Well, each one has its own risk and security factors, one must do a proper homework. Now Stable Value accounts are provided certifications from the government, so are very secure, but the growth rate of money is very steady and not highly progressive. However Stock markets are may be very progressive, or equally downfallen. Bonds again have a steady growth with money paid back with interest after a period of time. So priorities need to be considered before getting into any investments.


So here it is one of the best ways to become a millionaire, and the safest way if someone still believes that SLOW AND STEADY WINS THE RACE