401(k) Plans - Beyond The Usual,
You Can Defer MORE Than You Thought
This Isn’t Your Father’s Retirement Plan…
There are exciting things that you may be able to to with a 401(k). Why? Because there are more 401(k) offerings out there than the one that you are most likely familiar with.…
First, let’s review the traditional 401(k), the one you probably know…
With the demise of defined benefit plans — what most people call pensions — new financial instruments have arisen — defined contribution plans. Perhaps most popular of these is the defined contribution plan offered by employers known as a 401(k). (There are two other kinds of defined contribution plans– profit-sharing plans and money purchase pension plans, but those are beyond this topic here.)
401(k) plans are run by employers as a benefit to their employees, who have the option of participating or not.
If you work for an employer who provides a 401(k) plan, you are able to defer a certain percent of your compensation, up to a maximum percent, for retirement. This money is then invested within the options provided by the employer’s 401(k) plan. By deferring the money, two advantages occur: First , the compensation is not taxed until the money comes out at retirement (starting at age 59 1/2),. Second, the earnings on these investments also grow tax-free until they are withdrawn at retirement.
In addition, employers encourage their employees to join the 401(k) plan by matching your contributions. The match is typically 50 cents on the dollar up to 6% of pay, thereby capping any potential match at 3% of payroll.
The maximum payroll deduction for 2007 is $15,500 with a $5,000 catch up provision for those ages 50+ and in 2008 the deferral limit goes up to $16,000 with the same catch up amount. The following is a table of 401(k) contribution limits:
||Total Age 50+
But it may be possible for you to defer more, MUCH more than a traditional 401(k).
401(k)s are among the most well-known of retirement savings plans. However, they may not be the best. While there are a number of wealth-creating strategies on this site, including ones that use such tool as life insurance and “non-qualified retirement plans’, we’ll mention some of the other possibilities with different types of 401(k)s.
First, and newest — having come into effect January 1, 2006 the Roth 401(k). Like Roth IRAs, your money from after-tax earnings funds the Roth 401(k) and leaves, at retirement, tax-free — along with any earnings from that account!
Next, depending upon your situation, there are even more exciting possibilities.
For instance, if you are a business owner with NO employees (except a spouse) then the “Solo” 401(K0 may be just the thing — allowing you to defer up to $46,000/yr EACH, three times that of a traditional 401(k).
Finally, if you are an owner of a business or a key employee — especially if you are older — then you may want to look at a (DASH) 401(k) plan. “DASH” stands for “Double Advantage Safe Harbor” (what a mouthful!). It permits the ability to dramatically skew benefits to the older groups when the preferred employees are older than the average age of the non-preferred employees.
All of these 401(k) topics are covered more fully in our wealth vault. Why not check it out now?
Or if you want to explore strategies that may be even more effective in growing your wealth and providing you with a wealthy retirement — why not call our office today for a free, no-obligation, consultation at (269) 216-9978, or sign up for one and write in your questions, and we’ll get back to you soon with answers.