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Recession information: understanding 401(k) accounts during recession
401(k) accounts, or given the ongoing recession as some have recently aptly referred to
them, 201(k) accounts [:)] provide a number of advantages and disadvantages:
1) Every time you contribute to your 401(k) account, you receive a tax break because your
401(k) contributions come from your income before taxes, which naturally lowers your
taxable income and amounts to a tax break.
2) 401(k) accounts provide opportunity for a tax-deferred growth, which means you do not
pay taxes annually on your capital gains and dividends, which in turn allows for higher
compounding on your savings.
3) There is a limit on how much you can contribute to your 401(k) account annually. The
maximum permitted annual contribution to 401(k) accounts as of 2007 was $15,500. But the
number is likely to increase each year until 2011. Individuals 50 or older may contribute an
additional $5,000 annually. Please note that employers may put additional restrictions on
401(k) plans.
4) One of the major drawbacks of 401(k) accounts is that if you withdraw money from your
account before the age of 59.5, as many have had during the ongoing recession, in most
cases you will owe income taxes on the amount withdrawn as well as a 10 percent penalty
that you need to pay for withdrawing your money before retirement.
5) A question that comes up often about 401(k) accounts is what will happen to your
account when you change jobs. In short, when you change your job you can
a) Cash out, in which case you need to pay income taxes in addition to a 10% penalty
unless you are above 59.5 of age,
b) Move your money into a new 401(k) through a trustee-to-trustee transfer (meaning
you never had access to the money and it was transferred between the old and new
employers, which will allow you to avoid potential rollover mistakes),
c) Leave your money in the old 401(k), which is generally allowed unless you have less
than $5,000 in the plan.
6) Post retirement, the general wisdom is that the more money retirees are able to leave
tax-deferred (either in an IRA or 401(k)), the more compounding interest they will receive
over time.
The information here is only meant to provide a general understanding. In each case, you
should consult a qualified professional before making your decision.
401(k) accounts, or given the ongoing recession as some have recently aptly referred to
them, 201(k) accounts [:)] provide a number of advantages and disadvantages:
1) Every time you contribute to your 401(k) account, you receive a tax break because your
401(k) contributions come from your income before taxes, which naturally lowers your
taxable income and amounts to a tax break.
2) 401(k) accounts provide opportunity for a tax-deferred growth, which means you do not
pay taxes annually on your capital gains and dividends, which in turn allows for higher
compounding on your savings.
3) There is a limit on how much you can contribute to your 401(k) account annually. The
maximum permitted annual contribution to 401(k) accounts as of 2007 was $15,500. But the
number is likely to increase each year until 2011. Individuals 50 or older may contribute an
additional $5,000 annually. Please note that employers may put additional restrictions on
401(k) plans.
4) One of the major drawbacks of 401(k) accounts is that if you withdraw money from your
account before the age of 59.5, as many have had during the ongoing recession, in most
cases you will owe income taxes on the amount withdrawn as well as a 10 percent penalty
that you need to pay for withdrawing your money before retirement.
5) A question that comes up often about 401(k) accounts is what will happen to your
account when you change jobs. In short, when you change your job you can
a) Cash out, in which case you need to pay income taxes in addition to a 10% penalty
unless you are above 59.5 of age,
b) Move your money into a new 401(k) through a trustee-to-trustee transfer (meaning
you never had access to the money and it was transferred between the old and new
employers, which will allow you to avoid potential rollover mistakes),
c) Leave your money in the old 401(k), which is generally allowed unless you have less
than $5,000 in the plan.
6) Post retirement, the general wisdom is that the more money retirees are able to leave
tax-deferred (either in an IRA or 401(k)), the more compounding interest they will receive
over time.
The information here is only meant to provide a general understanding. In each case, you
should consult a qualified professional before making your decision.
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