A 401(k) is a retirement savings program provided by your employer that allows you to save pre-tax dollars for your retirement, thereby reducing your current federal taxable income. Your money is invested in funds chosen by you and grows on a tax-deferred basis until you start receiving distributions, usually at retirement. The term, 401(k), simply refers to the section of the Internal Revenue Code that allows this type of program and qualifies it for certain exemptions under federal laws.
A 401(k) gives you two tax benefits:
No. Social Security taxes are based on your full salary without taking into account the amount you have deferred. For example, if you defer $3,000 of a $20,000 salary, your W-2 will show taxable income of $17,000 instead of $20,000. Social Security tax (FICA), however, is calculated on the entire amount of $20,000.
If you participate in a 401(k), you may pay less current tax and your savings may grow much faster, leaving you more money for your retirement. This hypothetical illustration compares taxed and tax-deferred growth of investing $100 per month for different periods. The investment periods all earn a hypothetical annual effective interest rate of 8% (which is not indicative of any particular investment) and are taxed at a 28% interest rate. It does not reflect product charges or expenses, which can lower tax-deferred performance.
The below chart is for illustration purposes only and should not be used to project or predict investment results. With actual investments, returns and principal value fluctuate and units (or shares) may be worth more or less than their original cost at any time.
Changes in tax rates and tax treatment of investment earnings (e.g. lower maximum tax rates on capital gains and dividends) may impact the comparative results. Investors should consider their personal investment horizon and income tax brackets, both current and anticipated, when making an investment decision as these may further impact the results of the comparison. Consult your tax advisor for more information.
Yes, you may contribute to an IRA if you also have a 401(k), but whether or not your IRA contribution is deductible depends on your income level. If you are ineligible to deduct your traditional IRA contribution, you may still make a non-deductible contribution. Your spouse, whether or not working, may contribute to a deductible IRA if your joint Adjusted Gross Income (AGI) is below certain levels or if they work, but do not have a retirement program. You may also contribute to a Roth IRA if your AGI is below certain levels. Contact your financial representative for more information.
The IRS requires that you begin taking distributions from your program by April 1st following the year you reach 70½ or retire, whichever is later. The amount that you must withdraw is based on an IRS formula. Contact your financial representative for more information.
In the case of your death, your account is transferred to your designated beneficiary.
When you leave your company, you may roll your account over to an IRA or other eligible program. If your account balance is $5,000 or more, you may leave your money in the program. If you do not have the withdrawal rolled directly into your IRA or a new program, the IRS imposes a mandatory 20% withholding tax.
The amount you contribute to your 401(k) program and any investment earnings on those contributions always belong to you no matter what changes occur in your company's business structure or operations.
It's simple. You choose to "defer" a percentage of your current pay directly into the program. This amount is automatically deducted from your paycheck before taxes are calculated.
Pre-tax contributions are deducted and invested directly from your paycheck, making saving for retirement easy and painless. And because your contribution is subtracted from your paycheck before taxes, pre-tax contributions may actually allow you to save more than traditional after-tax investments.
For example, consider a person earning $2,000 per month with a federal income tax rate of 28% who wants to save $100 a month in his or her 401(k). Putting this amount in a 401(k) instead of a regular after-tax investment saves a hypothetical $28 per month, or $324 in federal income taxes each year.
Federal legislation now allows that up to 100% of employees' adjusted gross income may be contributed on a pre-tax basis, not to exceed the amounts listed in the chart that follows. The chart contains the dollar limits set by the IRS until 2006, along with the amount allowed for any catch-up contributions. Catch-up contributions are allowed by those who are 50 or older in the given program year. The actual contribution amount may vary based on your employer's specific program design.
State laws may further limit your eligibility/deductibility. Please consult your tax advisor for your particular state's limits. Review IRS Publication 590 or contact your tax advisor to determine your eligibility to make a deductible contribution.
Yes, you can stop or change your contribution at any time by accessing your online account (found either at www.symetra.com or www.symetra.com/mfretirement depending on your account type). Your employer's program may limit how often you can change the amount of your deferral contributions.
No. All contributions to your 401(k) must be deducted from your paycheck or made by your employer.
Your 401(k) is designed to help you accumulate long-term savings. To maximize the benefits of tax-deferred savings features and avoid possible tax penalties, you should leave your money in the program until you begin taking withdrawals during retirement. However, your program may allow for loans, financial hardship or in-service distributions.
Loans
Your employer may allow you to borrow money from your account and "pay yourself back" at a reasonable interest rate. The maximum loan amount cannot be more than 50% of your vested account balance, not to exceed $50,000.
Withdrawals
Because your 401(k) is designed to meet long-term savings goals, withdrawals are only allowed if:
- You retire
- You terminate your employment
- You die, in which case your beneficiary will receive your contributions and earnings
- You become permanently disabled
- You experience financial hardship, as defined by the IRS
A hardship withdrawal is one that is made because of an immediate and heavy financial need that cannot be satisfied from other resources. Examples of immediate and heavy needs are:
Any amounts withdrawn from the program, including hardship withdrawals, will be taxed to you as ordinary income. For example, if you withdraw $15,000 in the current year, this amount will be included in your gross income for tax purposes. You may also be subject to a 10% IRS penalty tax if you are under age 59½.
Yes, you can generally rollover any percentage of your distribution into a traditional IRA. Certain distributions such as hardship withdrawals, however, are not eligible for rollover and are fully taxable to you. Any amount not rolled over may be subject to tax. Contact your financial representative for more information.
Your program may allow you to select various forms of withdrawal. Generally, options include a variety of annuity, systematic withdrawal or lump-sum distribution options.
Copyright © 2004 - 2010 Symetra Life Insurance Company, 777 108th Ave NE, Suite 1200, Bellevue, WA 98004. All rights reserved. Symetra® and the Symetra Financial logo are registered service marks of Symetra Life Insurance Company.