401(k) Plans

Many companies choose to offer a 401(k) plan to help their employees save for retirement. A 401(k) plan isn't actually a plan at all, it's an addition to another plan! A 401(k)cash or deferred alternative is added to a profit sharing plan or a stock bonus plan, so let's start there.

A profit sharing plan is a defined contribution plan where the employer can choose to provide retirement funds if the company makes a profit. (Actually, sometimes a company makes a contribution even if they don't make a profit, but the contribution is optional). They make the contribution is in cash. A stock bonus plan is just like a profit sharing plan except the company makes the contribution in stock.

Many employers choose to offer a safe harbor 401(k) designed to guarantee a level of benefit for the employees and to allow the executives to defer more money. These are qualified plans, which means the government has lots of rules to make sure that the employees benefit from the plan as much as the owners.

Are you still awake? Back to what 401(k) means. It's the employees opportunity to defer additional money into their plan. This year, in 2010, an employee can defer up to $16,500 into their account, with an additional $5,000 allowed if you're over
50. This means you put the money into the account in pre-tax dollars and pay ordinary income tax once you take distributions after you are retired.

If your company has a retirement plan, you're very fortunate. Take advantage of the opportunity.

Be Prosperous!
Peggy