Page 14 - Means Wealth 2020/2021 Perspectives

401(K) PLANS

What is a 401(k) plan?
A 401(k) plan is an employer sponsored retirement plan. Plan participants
contribute to their own account via payroll deduction. Most plans offer
the option to make either “Traditional” (pre-tax) contributions, or “Roth”
(after-tax) contributions.
Traditional contributions reduce your taxable income in the year in which
they are made. The money is invested and grows tax deferred – you don’t
pay any income tax until you make withdrawals. When you do take money
out, the amounts withdrawn are taxed at your regular income tax rate at the
time of withdrawal.

Roth contributions are made with after-tax money. You don’t get an up-
front tax benefit. However, the money grows tax-free and distributions are
completely penalty-free as long as you have been in the plan for at least five
years and are over 59 ½ years old.

Your employer may choose to contribute to your plan on your behalf. Many
employers will choose to match all or a portion of your own contribution
up to a limit. A typical match might be 100% of your first 2% (of your salary)
and then 50% on the next 4% for a total match of 4% on your 6% deferral.
Matching contributions might be subject to a vesting schedule, that is if
you leave employment before you are fully vested not all of the match will
be yours to take with you. It’s important to note that employer matching
contributions are always made as Traditional contributions. Plans that allow
both Traditional and Roth contributions will track the contribution types (and
subsequent growth) separately.

Generally younger participants and/or lower wage earners should consider
Roth contributions. There is a longer time for that money to grow and come
out tax free in retirement.

Higher wage earners nearing retirement may want to make Traditional
contributions. The immediate tax benefits may outweigh the relatively
shorter period of tax-free growth. There are online calculators available or
your Financial Advisor here at Means would be happy to help you determine
if pre-tax or after-tax contributions are right for you.
Sounds great, when can I start participating?

There is usually some type of waiting period before you are eligible to
participate. Your employer should notify you of your eligibility date when
you are hired. If not, then you can find this out by contacting your Human

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