What Is A (k) Plan?

The (k) retirement plan is funded by employee contribution and a matching employer contribution. The major feature of the plan is that the contributions are taken from pre-taxed salary. The fund accumulates tax-free until it is withdrawn. Most businesses and tax-exempt organizations can create these retirement plans. The (k) takes its name from the IRC (Internal Revenue Code) of . The operation of the (k) is administered by the EBSA (Employee Benefits Security Administration) of the Department of Labor. The (k) plan has a lot of advantages. First and foremost is that the employee can contribute pre-tax money that reduces the tax paid in each paycheck. Also, the company contribution and any growth in the fund is free of tax until withdrawn. The compounding of the fund during a to year period is quite amazing. The employee has a lot of control in the direction of the future contributions. When the company matches your contributions, it adds something extra on top of your own money. All money in the plan can be moved from one company to another unlike pension. The (k) plan is protected by pension laws since it is a personal investment plan. It includes protection from garnishment by creditors but not from domestic cases that include child support. There are some disadvantages in the (k) plan, it is hard to get your (k) contributions before age ( / to be exact). The (k) is not insured by the PBGC (Pension Benefit Guaranty Corp). Also, the company contributions do not kick in until a certain number of years of service have been given. The rules state that company matching contributions must either be a year 'cliff' plan ( percent after years) or a -year 'graded' plan. Employees participating in a (k) plan have many options for investment. In most cases a listing of mutual funds. The mutual funds usually include money market fund, treasuries, stock funds and bond funds. Some plans may include investing in company stock and US Savings Bonds. The employee gets to choose how the savings is invested. The employee can also choose at any time to stop contributions. Financial advisers usually say that the average (k) contributor is non-aggressive in terms of their investment options. Stocks have historically outperformed other types of investment, since the (k) is a long term investment it should be able to minimize the stock fluctuations.