It is a type of retirement plan available for employees who
want to save their money for their retirement. The employer should have
provided 401k plan to their employees. In this plan the account is funded
through pre-tax payroll deduction. The funds in this account can be invested in
stocks, Bonds, Mutual Funds etc.
The benefits of 401k plan:
1) You can get free money from your organization or
employer, commonly known as 401k employer match.
2) The taxes on the income are very minimal.
What is 401k deferral and annual contribution limits?
401k Deferral contribution limits: The Elective deferral a
401k participant can contribute to his 401k account is known as 401k contribution.
The maximum 401k contribution limits for the year 2012 is $17,000 and if the
participant age is 50 or over then he can contribute an additional amount up to
$5,500 to his account. This additional amount is known as 401k catch –up contribution
Limit.
What does it mean by employer matching 401k contribution?
Most of the employer offers their employees matching 401k
contributions in addition to the elective deferral made by employees. Commonly
the 401k employer match contribution is limited to a percentage of employee’s
pre tax contribution.
There are various types of matching plan an employer can
choose to implement, but commonly the employer will offer to contribute in one
of the following ways.
1)
Dollar to Dollar Match: In this type of employer
contribution match employer offer a contribution up to a certain percentage of
employee’s salary, that is 100% of contribution match up to 6%.
2)
50% of the contribution matches up to 8%.
