What is 401K Retirement Law?
A 401(K) retirement plan is a qualified profit-sharing account that allows an employee to contribute a portion of their wages to individual accounts. The basic rules of a 401K retirement law are as follows:
• An employer can contribute to employee accounts
• Elective salary deferrals are excluded from the employee’s taxable income (this does not hold true for designated Roth deferrals).
• Distributions—including all earnings—are includible in taxable income at retirement (this does not hold true for qualified distributions of designated Roth Accounts).
Within a 401(k) plan, an employee can choose to defer some of their salary; instead of receiving the deferred amount in their paycheck, the employee will delay or defer the funds. In this case, their differed funds are placed into the 401(k) plan. These deferred funds do not get taxed by the federal government or by the majority of state governments until it is withdrawn or distributed.
The contribution limits, as stipulated by 401k retirement law, are as follows:
The employee cannot contribute more than $16,500 to his or her retirement plan for the 2011 taxable year. If the employee is at or over the age of 5, an additional “catch-up” contribution is permitted. The additional contribution amount for 2011 is $5,500. The individual employee may withdraw funds from his or her plan; however, 401k retirement law states that such a maneuver is subject to a 10% taxation if the individual is under the age of 59 ½.
When an employee establishes the plan, according to 401K retirement law, they are required or permitted to the following:
• The 401 (k) holder can utilize other retirement plans
• The 401 (k) can be held by a business of any size
• The 401 (k) holder is required to annually file a Form 5500
Pros and Cons of a 401(K)
Because of 401 (K) retirement law, the plan has a number of benefits and drawbacks. The following list will provide the pros and cons of the retirement plan as regulated by 401k retirement law:
• A 401k retirement plan allows for greater flexibility in contributions.
• 401k retirement law enables an employee to contribute more to the plan than an IRA would allow
• A 401k is a good plan if cash flow is an issue for the employee
• 401k retirement law allows for optional participant loans and hardship withdrawals—these maneuvers offer added flexibility for employees
• 401k retirement law calls for a number administrative costs; these costs are typically higher than more basic arrangements. Moreover, the additional loan and withdrawal flexibility will add administrative burdens for the employer.