Make your 401k Plan Work for You

What Is a 401(K)?

If you work at a corporation of any size, you may find that a 401(K) plan is a part of your benefits package. For many people, the details of this savings option seem confusing, especially if they have never before dealt with one. Learning more about the possibilities and benefits of this tax sheltered savings and investment account. Making the most of both the tax savings and employer contributions can improve your overall financial outlook in the long term.

In the simplest terms, this plan is a tax shelter. You make contributions before taxes and they are made directly during the payroll process. The account, named for its section and paragraph in the IRS tax codes, serves as a vehicle for retirement savings. The funds in the account will then be invested by a plan manager, but you may have some amount of control over how the funds are invested, typically in terms of the amount of risk you are willing to take with your money. The specifics of your control of your money may vary depending on your company's policies, who they invest with and more. Learning about the investment choices associated with your retirement savings will allow you to make smart choices. Younger employees may accept more risk than older ones.

While retirement savings is all well and good, the big benefit of your 401(K) has less to do with the IRS and more to do with your employer. Many employers match some portion of your contributions to your retirement accounts, but may require that you have worked there for six months to a year before you are eligible. Your human resources department or benefits coordinator can provide you with specifics about employer matching funds.  Contribution limits are typically between 1% and 20% of your annual salary. The maximum pre-tax limit is set by the IRS annually, but your employer's maximum limit may be lower.

Can I Pay off Credit Card Debt with my 401k Plan Money?

You can withdraw funds from your 401(K), however, you should expect to pay both taxes and a 10% early withdrawal penalty if you are under 59.5 years of age. Hardship loans are an option for home financing, educational needs and certain financial emergencies. These are typically an affordable option and can allow you to borrow money from yourself.  Many financial gurus such as Suze Orman do not recommend paying off credit card debt or anything else with your 401k money because of the penalities.

The Rollover:  Changing Jobs with a 401k Employer Plan

If you change jobs, you have several options. If you have over $5000 in your account, you can keep it with your former employer, but if you have less saved they may insist that you withdraw the funds. You can also roll your 401(K) into your new employer's program, thereby avoiding any penalties. Finally, the most popular option is to roll your funds into a tax deferred IRA account. This option allows you to make your own financial choices, eliminates worries about employer rules and prevents tax and withdrawal penalties.