About Your 401(k) Plan

Note: The information contained on this page is intended to provide basic information about 401(k) plans. Plan participants must contact their company’s Human Resources department for information about their plan.

 

What is a 401(k) plan?

A 401(k) plan, which is named for a section of the Internal Revenue Code, is a tax-deferred investment and savings plan that allows employees to save and invest for their own retirement.

In a 401(k) plan, employees contribute part of their salary, before income taxes, to a company-sponsored retirement plan. The employee’s pre-tax payroll deductions, or "deferrals," are invested in mutual funds or other investment options offered by the company's plan. Both the contributions and the investment earnings are allowed to grow tax-deferred until withdrawal, at which time they are taxed as ordinary income.

You should receive a financial statement of your 401(k) account at least once a year, generally every quarter, which shows your contributions and the performance of your investments. In addition, you can access a summary of your retirement account via the Internet through the ABC Retirement Online service you're currently logged into.

 

What are the benefits of a 401(k) plan?

Following are some good reasons to contribute to a 401(k) plan:

  • Pre-tax Savings - Federal and most state income taxes are deferred on your contributions until they are withdrawn, which reduces your current tax obligation. The more you contribute, the more tax you defer. You pay tax when you receive payments from the plan.
  • Company Match - Some employers offer some type of company match as an incentive for employees to join the plan. For example, if you contribute 2% of your salary, your employer may "match" this amount by also contributing an amount equal to 2% of your salary to your retirement account. Please check with your company’s Human Resources department to determine if this feature is offered with your 401(k) plan.
  • Tax-deferred Growth - The earnings on your 401(k) account are not taxed until you take money out of your plan.
  • Investment Compounding - As your money earns interest or investment earnings, that additional income goes back into your plan account and earns interest or investment earnings itself.
  • Automatic Payroll Deduction - Contributions are automatically deducted from your paycheck and saved to your 401(k) account. This feature allows you to save money before you have a chance to spend it.
  • Choice - You decide if you want to participate in your company' plan and how much you want to contribute (within the limits). In addition, you select your investments based on when you want to retire and your personal tolerance for investment risk.
  • Portability - The money you contribute to your 401(k) account is yours. If you change jobs, the money you have contributed to your plan account can go with you. You can roll over your vested (owned) account balance into another employer’s 401(k) plan or an ABC IRA (Individual Retirement Account).

 

What happens when I retire?

Assets in your 401(k) account can be withdrawn without penalty after age 59½, and you must begin to withdraw money from your account no later than April 1st of the year following the year in which you turn age 70½. Withdrawals are referred to as distributions, and distributions must be taken annually. Distributions taken after age 59½ are subject to the following tax treatment:

  • Pre-tax contributions: Both the contributions and the investment earnings are treated as income.
  • After-tax contributions: The contributions are treated as a nontaxable return of capital, but all investment earnings are treated as income.

If you are considering taking a withdrawal, check with your company’s Human Resources department or the Internal Revenue Service for more details.

 

How can I improve the performance of my retirement account?

Millions of Americans participate in a 401(k) plan, but many have never changed their asset allocation from the time they first opened their account. Proper asset allocation is very important to the overall performance of your retirement account. ABC’s Retirement Online allows you to access your account information and change your investment allocations quickly and easily. Through Morningstar.Com, you can access fund-specific information to help you make decisions about the investments available in your company's plan.

ABC offers the following online Retirement Calculators, which can be used to help you make investment decisions about your 401(k) account:

 

What if I leave my current employer?

If you leave your current employer, you may be able to choose from the following distribution options:

  1. Roll your account over to another qualified retirement plan, like an ABC IRA. By doing so, you avoid any penalty or withholding tax.
  2. Keep your money in your current employer’s retirement savings plan. If the vested account balance is greater than $5,000, most plans will let you leave it in the plan until age 70½ or retirement, whichever is later.
  3. Purchase an annuity.
  4. Roll over to your new employer’s qualified retirement savings plan.
  5. Take a lump sum distribution. If you decide to take a distribution before age 59½, you will pay a 10% premature withdrawal penalty, and your employer is required to set aside 20% for federal withholding tax on any amount that is not directly rolled over into a qualified plan.

Check with your company’s Human Resources department for additional options that may be available.

 

 What fund styles are available to me within the plan?