401(k) today: designing, maintaining & maximizing your by Stephen J Butler

By Stephen J Butler

The writer, cofounder of a third-party pension management enterprise and public speaker, discusses how 401(k) plans paintings, the best way to examine the standard of a plan, and the way to revamp it to be greater. Of most probably curiosity to corporation decision-makers and energetic 401(k) plan members.

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Sample text

Plans not passing these tests are disqualified, lose their favorable tax status, and incur substantial penalties. 401(k) Plans are Portable ¨ When participants leave a company, they can ¨ Be paid the account balance in a lump sum and pay taxes on the distribution. ¨ Leave their 401(k) account balance with the former employer and continue to enjoy a tax-deferred treatment. ¨ Roll the account balance into an IRA or the new employer's 401(k) plan and also continue to enjoy a tax-deferred treatment.

Further, they are difficult to explain to employees, and they can create the need for an additional test. ¨ If a matching contribution is offered, it should be immediately 100% vested, be relatively small, and be capped at an annual dollar amount per employee. Page 27 Chapter 3 Daily versus Quarterly Valuation: Is Daily Valuation Really Worth It? The greatest single buzzword to ever hit the pension business is daily valuation. Nothing else comes close, except perhaps the term 401(k) itself. This chapter discusses daily valuation and its advantages and disadvantages compared to quarterly valuation, which is the traditional method for valuing 401 (k) plan assets.

The employee pays combined federal and state taxes at a rate of 34%. 3. The savings earn an annual rate of 8%. Using after-tax dollars in a regular savings plan, the employee accumulates only $42,034. This compares to $88,353 using the 401(k) plan. 2 shows that these differences grow progressively larger during longer periods of time, and during a 30-year period, they become astounding. But as unbelievable as these differences seem, 401(k) plans can accomplish this feat, thanks to the magic of compound interest operating in a tax-deferred environment.

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