Question

Section 401 (K) plans: who can use them and who cannot use them.

do these accounts typically provide sufficient income in retirement? EXPLAIN your answer

Answer 1

Section 401 (K) plan :

It is the tax qualified, defined contribution pension account. Under this plan, retirement savings contributions are provided by an employer deduction from an employee's paycheck before taxation and limited to a maximum pre tax annual contribution of $19000.

Who can use them-

All employees who are willing to participate in the 401 (k) plan can use them but subject to some conditions.

The conditions include employee who is willing to participate in this plan must become eligible to make retirement contributions.

Some business may allow new employees to enter 401(k) plan immediately or require them to meet minimum age and service conditions first. They may also keep certain employees out of the plan altogether. Some eligibility basics to understand include the following

• Minimum age - The age for the employees must be 21 or more and period of service is one or more years.

• Two options for crediting eligibility purposes:

1. Elapsed time method : The easiest way to measure service. Only time of employment is important. Hours worked is irrelevant.
2. Counting hours method: An employee must for specified number of hours during the Eligibility Computation Period.

It is for the employer to choose any of the eligibility criteria methods for its employees. Only those who are eligible can use the plan.

Who cannot use them-

• Employees who are below 21 years of age and period of service less than one year cannot use them as they tend to shift from one job to another.
• Employees who are ineligible in the view of the employer cannot use the plan.

Yes, the plan provides sufficient income in retirement. The income you contribute every year will decide the income in retirement. Maximum amount you can contribute to the plan is $19000 in a year. The early you start the plan the more income you make in retirement.

Even 1% contribution of your income to the plan makes a difference in the income after retirement. The amount cannot be withdrawn in any situations before retirement. Therefore there's a locking period until retirement. If you want to withdraw the amount before retirement, penalties are imposed.