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401k Plan Types
Retirement. Almost everyone looks forward to retiring from their job to live out the rest of their life on their terms. Yet, for most, it’s a distant goal that doesn’t hold a lot of weight in day to day decisions. But it should. That retirement date is going to get here eventually, and you want to be prepared. One of the best ways to do that is to participate in some kind of retirement plan such as a 401(k). But with so many 401k plan types available, where do you start?
What is a 401k Plan?
You’ve probably heard of a 401(k). If not, it’s a qualified retirement plan. Qualified simply means it meets the standards set by the IRS for tax-favored status. Therefore, employee contributions through wage deductions are either pre-tax or post tax depending on the plan. With some 401k plan types, employers also contribute through “matching” contributions. Matches are typically based on a percentage of what the employee contributes.
There are a few different types of 401k plans:
- Traditional 401k
- Self-directed 401k
- Safe harbor 401k
- Tiered profit sharing 401k
- Simple 401k
Each of these 401k plans has different rules, risks, and rewards.
Traditional 401k Plans
With a traditional plan, in addition to elective deferral contributions from employees, employers have the option of making contributions. Employers also have the option to see to it that only their loyal employees benefit from these contributions. For example, if an employee quits their job prior to a pre-determined length of employment, the amount contributed by the employer is forfeit. If you’ve heard the term “vested” when it comes to your 401k, this is what that term refers to.
Self-directed 401k Plans
A self-directed 401k is similar to the traditional version. It offers pre-tax savings with paycheck deductions. However, it does vary when it comes to the investment option. With this plan, the employee acts as the fund manager. This means they have a bigger variety of available investment options to choose from. With traditional plans, employees typically are lumped into a mutual fund. So, self-directed plans allow you, as an investor, the option of choosing from a wide selection of bonds, stocks, mutual funds, and other options.
Safe Harbor 401k Plan
Unlike traditional plans, contributions from your employer in a safe harbor plan aren’t forfeitable. As soon as the employer contributions are made, they are fully vested. This also allows employers to make contributions even if employees don’t contribute themselves. The limit being that the employer contribution must not exceed 5 percent of the employee’s pay. Employers can also do a dollar for dollar contribution match up to 3 percent of the employee’s pay. There are also several other ways employers can contribute to their employee’s safe harbor plan.
Tiered Profit Sharing 401(k)s
Well performing businesses with 50 or fewer employees seem to favor the tiered profit-sharing plans. Employees are rewarded when classified into company-wide groups, usually based on different salary structures. The owner then apportions a varying profit share for each group. This rewards them in connection to the business’s success.
Simple 401k Plans
Simple 401k plan types are somewhat common for business owners with one hundred or fewer employees who’ve been paid a minimum of $5000 each. All employer and employee contributions are fully vested. The employer either makes a matching contribution up to 3 percent of each employee’s pay, or a non-elective contribution of 2 percent of each employee’s pay.
Choosing the Right 401k Plan Type for You
It’s important that you plan for retirement. You work hard your entire life. You should be able to enjoy it. With careful planning and a little guidance, you can set and pursue retirement goals to live the future you’ve dreamed of. The most important thing is that you don’t wait. The earlier you start contributing to your retirement, the better. However, even if you got a late start on your retirement planning, there’s still time.
When choosing a plan, you want to make sure you’re evaluating all the pros and cons of each. Ask for information about the plan your employer uses. If they contribute or match your contributions in any way, you’ll want to do what you can to take full advantage of that match.
If you’re not sure where to start, then a professional and experienced wealth management company should be your first phone call. They’ll help you evaluate your goals and see what steps you need to take to reach them. A quality wealth management company looks at the big picture to see what you can start doing now to improve your retirement later.
The experienced professionals at Virtus Wealth Management are here to help you create a plan after considering all the factors around your unique situation. A tailor-made, stress-tested plan will help ensure you’re confident in your future.
Call Virtus Wealth Management today at (817) 717-3812 to discuss 401k plan types with our experienced staff and get on your way to planning for your retirement.
The information provided here is for general information only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There can be no guarantee that strategies promoted will be successful and no guarantee of positive results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.