What does the k in 401 k stand for?
Simply it is the tax code - think of it as an
outline numbering - 401 is the 401st section and
"k"is the subsection number/letter. The
K doesn't stand for anything that starts with the
letter K or 1000 increments. It stands for the (k) section of the 401st tax
code section that lets employees contribute to a retirement plan and not be taxed on what they
contribute.
What is 401
K or 401 B retirement plan?
401 K
A qualified plan established by employers to which
eligible employees may make salary deferral (salary reduction) contributions on
a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective
contributions to the plan on behalf of eligible employees
and may also add a profit-sharing feature to the plan. Earnings accrue on a
tax-deferred basis.
Caps placed by the plan and/or IRS regulations usually
limit the percentage of salary deferral contributions. There are also restrictions on how and
when employees can withdraw these assets, and penalties may apply if the amount is withdrawn while an employee is under theretirement age as defined by the plan. Plans that allow
participants to direct their own investments provide a core group of investment
products from which participants may choose. Otherwise, professionals hired by
the employer direct and manage the employees' investments.
A 401k retirement plan is a tax qualified deferred
compensation plan where an employee can elect to
have the employer contribute a portion of his or her cash wages to the plan on a pre-tax basis. Elective
contributions are not subject to income tax at the time of deferral and are not
reflected on the form 1040. They are subject to Medicare, Social Security, and
Federal Unemployment Tax and are included as wages for those deductions.
401 B
Questions about the
elusive 401b retirement plan have been cropping up on the web
and finding information regarding its form and structure is difficult. As of 2010 it is no longer available as a 401b. The
401a and 401b retirement plans were the for-runner of the current 401k retirement plan offered by most employers today.
The plans were offered from the late 1990's to 2002.
The term 401b refers to the IRS tax code (401 is the section and b is the paragraph), however, the codes for the original plans are no longer
available to view. Both the 401a and 401bretirement plans were replaced by the 401k
and are governed by the same regulations regarding deferrals and mandatory
withdrawal at age 70 ½.
A 401b retirement plan is often confused with the 403b retirement plan. The 403b retirementplan is most often a tax-sheltered annuity
account or custodial account invested in mutual funds. It is offered only to school employees,
non -profit organizations or ministers.
If you are a participant
in a 401b retirement plan it will simply function the same
as a 401kretirement plan unless there are specific restrictions in the
original setup. If you have more questions your financial advisor or tax
consultant will be able to guide you.
What is tax
rate on 401 k?
The great thing about
traditional IRAs and 401(k)s is that the earnings are tax-deferred.
You don't have to pay taxes on dividends, capital-gains distributions or
profits when you sell the investments as long as you don't withdraw the money
from the account. When you finally do take the money in retirement, it is taxed at your income-tax rate,
which can be from 10% to 35% depending on your income. After you retire, your
income-tax rate is likely to be lower than it was
when you were working.
But the portion of your
withdrawals that is taxed may be different for your 401(k) than it is for your traditional IRA. If
you've only made pre-tax contributions to the account -- which is the case for many 401(k) participants -- then
the entire amount you withdraw will be taxed. But if you've made any non-deductible contributions --
common for IRA participants with income above
the cut-off for deductibility -- then you'll owe
taxes only on the earnings from those contributions, but not the contributions
themselves.
If you withdraw money
from several traditional IRAs to which you made both tax-deductible and
non-deductible contributions, then the portion that escapes taxes is based on the ratio of
non-deductible contributions to the total balance in all of your IRAs.
See The
Taxing Side of IRA Conversions for more information.
And if you have any Roth IRAs, the tax calculation
becomes much easier. Your Roth withdrawals are 100% tax-free as long as you're
at least age 59½ and have had a Roth for at least five years.
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Where can you get a retirement plan?
There are many places to
get help with your retirement planning. If you're a do-it-yourself kind of person, or
you're just looking for some basic guidance, you can check out online
resources to learn the basics (you're off to a good
start!), and enter some of your numbers into some online calculators to
see where you stand.
If you have
a retirement plan through your
employer, they might offer some free seminars or classes on retirement planning that you
should take advantage of. Check with your human resources department.
Many 401(k) plans also offer varying types of advice and guidance,
ranging from tools and calculators to help you plan, to target-date
funds or managed accounts - if you'd rather not make your own investment
choices. In some cases, you might also have access to a financial adviser. Fees
can vary widely for managed accounts and
advice, so make sure to ask before you sign up.
If you feel
you really need some one-on-one help, or you have substantial assets that you
feel require professional management, you might want to consider hiring
a financial planner.
The most
important thing to remember is that you need to save as much as possible for your retirement - and you should
start as soon as possible. Don't get paralyzed by fear or indecision. Just use
the resources available to you, save early and save often!
