In the United States, the 401 (k) plan is a tax-imposed taxable account, which is defined in subsection 401 (k) of the Internal Revenue Code. Under the program, the contribution of pension savings is provided (and sometimes proportionately matched) by the employer, deducted from the employee's salary before tax (and therefore the tax is postponed until it is withdrawn after retirement or as permitted by applicable law), and is limited to annual donation of $ 18,500 (per 2018).
Other limited contribution plans provided by the company include 403 (b) plans for nonprofit agencies, 457 (b) plans for government companies, and 401 (a) plans. This plan can provide a total annual increase of $ 55,000 (per 2018) per plan participant, including employee and employee contributions.
Video 401(k)
Histori
In the early 1970s a group of high-income individuals from Kodak approached the Congress to allow a portion of their salaries to be invested in the stock market and thus exempt from income tax. This results in section 401 (k) incorporated in the taxation laws that allow this to be done. A portion of the Internal Revenue Code that made such a 401 (k) plan be enacted into law in 1978. It was intended to allow taxpayers to rest on the tax on deferred income. In 1980, a benefit consultant and lawyer named Ted Benna noticed the previously obscure provisions and found that it could be used to create a simple way, saving taxes to save for retirement. The client for whom he worked at the time chose not to create a 401 (k) plan. He then went on to install the first 401 (k) plan in his own company, Johnson Company (today doing business as Johnson Kendall & Johnson; At that time, employees can donate 25% of their salary, up to $ 30,000 per year, to their employer's 401 (k) plan.
Maps 401(k)
Taxation
Income taxes on pre-tax contributions and investment income in the form of interest and dividends are deferred taxes. The ability to suspend income tax to a period in which a person's tax rate may be lower is the potential benefit of the 401 (k) plan. The ability to suspend income tax has no benefit when participants are subjected to the same tax rate in retirement as when the original contribution was made or the interest and dividends received. Earnings from investments in 401 (k) accounts in the form of capital gains are not subject to a capital gains tax. The ability to avoid this second tax rate is a major benefit of the 401 (k) plan. Relative to investments beyond the 401 (k) plan, more income taxes are paid but tax deductible is paid on the whole with 401 (k) due to the ability to avoid tax on capital gains.
For pre-tax contributions, the employee does not pay federal income tax on the amount of current income he holds to the 401 (k) account, but still pays the total payroll tax of 7.65% (social security and medicare). For example, a worker who earns $ 50,000 in a given year and refuses $ 3,000 into the 401 (k) account that year only reports $ 47,000 in revenues on that year's tax return. Currently, this will represent short-term tax savings of $ 750 for one worker, assuming the worker remains within 25% of the marginal tax lever and no other adjustments (such as deductions). Employees ultimately pay taxes on money when he withdraws funds, generally during retirement. The character of any profit (including tax capital gains) is converted to "ordinary income" when the money is withdrawn.
Beginning in fiscal year 2006, employees were allowed to assign contributions as a Roth 401 (k) suspension. Similar to the Roth IRA provisions, this contribution is made on a taxable basis.
If an employee makes a tax-after-tax contribution to a 401 (k) non-Roth account, this amount is combined with a pre-tax fund and is simply added to the non-Roth 401 (k) base. When distribution is made the taxable part of the distribution will be calculated as the ratio of non-Roth contributions to a total of 401 (k) bases. The remainder of the distribution is tax-free and is not included in gross revenue for the year.
For the accumulated contributions after tax and income in the designated Roth account (Roth 401 (k)), "eligible distribution" may be made tax exempt. To qualify, the distribution must be made more than 5 years after the first Roth contribution is set forth and not before the year in which the account owner changes the age of 59½, unless the applicable exception is as detailed in the IRS code of part 72 (t). In the case of Roth's defined contributions, contributions made on a post-tax basis mean that the taxable income in the year of contribution is not reduced by the pre-tax contribution. Roth donations can not be canceled and can not be converted into future tax contributions. (Unlike Roth's individual retirement account (IRA), in which Roth's contribution can be characterized as a pre-tax contribution.) Administratively, Roth contributions must be made to separate accounts, and records should be kept that distinguish the appropriate amount of contributions and earnings that receive care Roth.
Unlike Roth IRA, there is no upper limit limiting restrictions for Roth 401 (k) contributions. Individuals who find themselves disqualified from Roth IRA may contribute to their Roth 401 (k). Individuals who qualify for both can contribute the maximum legal amount to either one or a combination of two plans (including both catch-up contributions if applicable). The annual limit of aggregate law established by the IRS will apply.
Withdrawals
The Internal Revenue Code imposes strict restrictions on deferred tax withheld or Roth contributions while a person stays with the company and is under 59 ½. Any withdrawal allowed prior to the age of 59½ is subject to excise tax equal to ten per cent of the amount distributed (above the usual income tax payable), including withdrawals to pay fees due to difficulties, except to the extent that the distribution does not exceed the amount allowed as a deduction under section Internal Revenue Code 213 to employees for the amount paid during the tax year for medical care (determined regardless of whether the employee details deductions for that tax year). The withdrawn amount is subject to the ordinary income tax for the participant.
The Internal Revenue Code generally defines difficulty as one of the following.
- Unbalanced medical expenses for participants, participant pairs, or dependent participants.
- Purchase of primary residence for participants.
- Payment of tuition and related tuition fees such as room and meals for the next 12 months for participants, spouse or dependent participants, or dependent children.
- Payments are required to prevent foreclosure or expulsion from the participant's primary residence.
- Funeral and funeral.
- Fixed the participant's primary dwelling damage.
Some employers may forbid one, several, or all of the causes of previous difficulties. To retain tax advantages on deferred income to 401 (k), the law imposes restrictions that unless an exception applies, money should be kept in the plan or an equivalent tax deferral plan until the employee reaches the age of 59 1/2 years. Money withdrawn before the age of 59½ is usually subject to a 10% penalty tax unless further exceptions apply. This penalty is above the "ordinary income" tax to be paid on such withdrawals. Exceptions to 10% penalties include: employee's death, total and permanent disability, separation from service on or after the year of the employee reaches the age of 55 years, periodic payments substantially below section 72 (t), eligible domestic order orders, and for deductible medical expenses (exceeding 7.5% floor). This does not apply to similar 457 plans.
Many plans also allow employees to take out loans from their 401 (k) to be repaid with after-tax funds at predetermined interest rates. The interest then becomes part of the balance of 401 (k). The loan itself is not taxable income or subject to a 10% penalty provided it is repaid in accordance with section 72 (p) of the Internal Revenue Code. This section requires, inter alia, that a loan for a period of not more than 5 years (except for the purchase of a primary residence), that a "reasonable" interest rate is charged, and substantially equal payments (with payments made at least every calendar quarter ) made during the loan period. Employers, of course, have the option of making their loan plan provisions more stringent. When an employee does not make payments in accordance with IRS plans or regulations, the balance of the loan will be stated in "default". Bad loans, and possibly accrued interest on loan balances, become taxable distributions to employees in the default year with all the same tax penalties and the implications of withdrawals.
These loans have been described as unprofitable taxes, on the theory that 401 (k) contains the money before taxes, but the loan is repaid with dollars after taxes. While this is true, the analysis is fundamentally flawed with respect to the principal amount of the loan. From your point of view as a borrower, this is identical to a standard loan in which you are not taxed when you get a loan, but you have to repay it with dollar tax. However, the interest portion of the loan payment, which is essentially an additional contribution to 401 (k), is made with after-tax funds but they do not increase the after-tax basis at 401 (k). Therefore, after the distribution/conversion of the funds the owner must pay tax on the fund for a second time.
Required minimum distribution (RMD)
Account owners must start creating a distribution from their account before April 1 calendar year after turning 70square or 1 April calendar year after retirement, whichever is slower. The number of distributions is based on life expectancy according to relevant factors from the appropriate IRS table. There are exceptions to the minimum distribution for people who are still working after they reach that age. Exclusions apply only to the current plan they follow and do not apply if the account owner is the 5% business owner who sponsored the retirement plan. The minimum required distribution applies to Roth's pre-tax and post-tax contributions. Only Roth IRAs are not subject to minimum distribution rules. In addition to exceptions to continue working after the age of 70½ differs from the rules for the minimum distribution of IRA. The same penalty applies to failure to make a minimum distribution. The penalty is 50% of the amount that should be distributed, one of the most severe punishments applied by the IRS. In response to the economic crisis, Congress suspended the RMD requirement for 2009.
Stop
Former employees ("discontinued participants") may close their 401 (k) account if their account balance is low; such provisions in the plan are referred to as "enforced disappearances" provisions. Nearly 90% of the plans have terms of forced termination. In March 2005, the limit to the termination terms was a $ 1,000 balance - a participant whose balance of more than $ 1,000 could not close his account. Before March 2005, the limit was $ 5,000.
Closing an account requires participants to roll over funds to an IRA, 401 (k) other plan or take a distribution ("cash out"). 85% of them with a balance of under $ 1,000 out of cash, either voluntarily or because of the terms of termination.
Rollover
Rollover between eligible pension plans is solved in one of two ways: by distribution to participants and subsequent rollovers to other plans or by rollover directly from plan to plan. Rollover after distribution to participants must generally be completed within 60 days of distribution. If the 60 day limit is not met, the rollover will be disallowed and the distribution will be taxed as ordinary income and a 10% fine will apply, if applicable. The same rules and restrictions apply to rollover from plan to IRA.
Rollover direct
A direct rollover of eligible pension plans into other eligible pension plans is not taxable, regardless of the age of the participant.
Traditional to Roth conversion
In 2013 the IRS began allowing the conversion of 401 (k) Traditional contributions to Roth 401 (k). To do so, employee company plans should offer Traditional and Roth options and explicitly allow such conversions.
Technical details
Contraction suspension limit
There is a maximum limit on annual annual employee prerequisites or a Roth salary suspension in the plan. This limit, known as the "402 (g)" limit, is $ 15,500 for 2008; $ 16,500 for 2009-2011; $ 17,000 for 2012; $ 17,500 for 2013-2014; $ 18,000 for 2015-2017; and $ 18,500 for 2018. For the coming years, the limit may be indexed for inflation, increasing by an increase of $ 500. Employees who are at least 50 years old at any time of the year are now allowed additional "chase" before tax contributions of up to $ 5,000 for 2008 ; $ 5,500 for 2009-2014; and $ 6,000 for 2015-2018. Limits for future "subsequent" contributions may also be adjusted for inflation by an additional $ 500. In eligible plans, employees may choose to contribute pre-tax or as Roth 401 (k) contributions, or a combination of both, but the total of the two contributions amount must not exceed the contribution limit in one calendar year. This limitation does not apply to post-tax non-Roth election.
If an employee contributes more than the pre-tax limit/maximum Roth limit to 401 (k) in a given year, the excess and income considered for the contribution must be withdrawn or corrected by April 15 of the following year. This violation most often occurs when someone redirects his employer in the middle of the year and the new employer does not know to enforce a contribution limit on behalf of his employees. If these violations are noticed late, employees will not only be required to pay taxes on the excessive amount of contributions in the year earned, the tax will be effectively duplicated because a late corrective distribution is required to be reported again as revenue together with the gain on the excess in the year of late correction made.
Plans prepared under section 401 (k) may also have an employer's contribution that can not exceed other regulatory limits. Contributions that match the company may be made on behalf of Roth's designee, but the match of the employer should be made on a pre-tax basis.
Some plans also have profit-sharing provisions where the employer contributes additional to the account and may or may not require appropriate contributions by the employee. This additional contribution may or may not require a suitable employee contribution to get it. As well as matching funds, this contribution is also made on a pre-tax basis.
There is also a maximum limit of 401 (k) contributions applicable to all employee and employer contributions of 401 (k) within a calendar year. This limit is a section boundary of 415, which is lower than 100% of the total employee's pre-tax compensation or $ 44,000 for 2006; $ 45,000 for 2007; $ 46,000 for 2008; $ 49,000 for 2009-2011; $ 50,000 for 2012; $ 51,000 for 2013; $ 52,000 for 2014; $ 53,000 for 2015-2016; $ 54,000 for 2017; and $ 55,000 for 2018. For employees over 50, a catch-up contribution limit is also added to section 415.
Government entrepreneurs in the United States (ie federal, state, county, and municipal governments) are currently barred from offering 401 (k) pension plans unless the pension plan was established before May 1986. The governmental organization may regulate the 457 (b) plan of pension instead.
Contribution deadline
For a company, or LLC taxed as a company, contributions should be made at the end of the calendar year. For private ownership, partnership or LLC is taxed as sole proprietorship, the deadline for depositing a general contribution is the time limit for personal tax filing (April 15, or September 15 if renewal is filed).
Highly compensated employee (HCE)
To help ensure that the company extends their 401 (k) plan to low-paid employees, the IRS rules limit employee maximum suspension with high corporate compensation (HCEs) based on the average suspension by high-compensated employee (NHCEs) employees. If less-compensated employees save more for retirement, then HCE is allowed to save more for retirement. This provision is enforced through "non-discriminatory testing". Non-discrimination testing takes the level of suspension from HCEs and compares it with NHCE. In 2008, HCE was defined as an employee with a compensation of more than $ 100,000 in 2007, or as an employee who has more than 5% of the business at any time during the year or prior year. In addition to the $ 100,000 limit for determining HCEs, a company may choose to limit the group of employees with the highest pay to the top 20% of employees rated on compensation basis. That is, for plans with the first day of the plan year in calendar year 2007, HCE is an employee earning more than $ 100,000 in gross compensation (also known as 'Medicare wage') in the previous year. For example, most of the tests carried out in 2009 were for the 2008 year plan, which compares the 2007 gross year plan's compensation to the $ 100,000 threshold to determine who is the HCE and which is the NHCE. The threshold becomes $ 110,000 for 2010-2011. The threshold is $ 115,000 for 2012-2014; and $ 120,000 for 2015-2018.
The actual percentage delay (ADP) of all HCEs as a group can not exceed 2 percentage points greater than all NHCEs as a group. This is known as the ADP test. When a plan fails in an ADP test, it basically has two options to be obedient. Excess returns may be given to HCEs to lower ADP HCE to graduation rates, or be able to process "selected non-elective qualifications" (QNEC) into some or all NHCEs to raise the NHCE ADP to the graduation rate. The return of excess requires a plan to send a taxable distribution to HCEs (or reclassification of regular contributions as a catch-up contribution subject to the annual catch limit for HCEs above 50) on 15 March of the year after a failed test. A QNEC should be provided immediately.
Annual contribution percentage (ACP) tests are similar but also include employee adjustments and employee post-employment contributions. The ACP does not use a simple 2% threshold, and includes other provisions that may allow plans to "shift" excess passing rates from ADP to ACP. A failed ACP test is also handled through an excess refund, or QNEC or match qualification (QMAC).
There are a number of "safe port" provisions that can allow companies to be exempt from ADP tests. This includes making a "secure port" contribution to an employee's account. A safe port contribution can be a match (usually 4% of salary) or non-elective profit sharing (3% of salary). A secure contribution of 401 (k) contributions must be 100% provided at any time with direct eligibility for employees. There are other administrative requirements within a secure port, such as requiring the employer to notify all eligible employees of the opportunity to participate in the plan, and to limit the employer to suspend the participant for any reason other than for a difficult withdrawal.
Automatic enrollment
Employers are permitted to automatically register their employees in a 401 (k) plan, which requires employees to actively opt out if they do not wish to participate (traditionally, the 401 employees required to participate). Companies that offer such automatic 401 (k) must choose the default investment fund and savings rate. Automatically registered employees will become investors in default funds at default levels, although they may choose different funds and rates if they choose, or even opt out entirely.
Auto 401 (k) is designed to encourage high participation rates among employees. Therefore, employers may try to register non-participants as often as once per year, which requires non-participants to opt-out each time if they do not wish to participate. Employers may also choose to increase the standard contribution level of participants, encouraging them to save more.
The 2006 Pension Protection Law makes automatic enrollment a safer option for employers. Prior to the Pension Protection Act, entrepreneurs are liable for investment losses resulting from such automatic registration. The Pension Protection Act provides a safe port for employers in the form of "Qualified Default Investment Alternatives", investment plans that, if selected by the employer as default plans for automatically enrolled participants, relieve the employer of financial liabilities. Under the Labor Department regulations, three major types of investment qualify as QDIA: life-cycle funds, balanced funds, and managed accounts. QDIA provides fiduciary support sponsorship similar to the help that applies when participants choose their investment.
Cost
401 (k) plans charge fees for administrative services, investment management services, and sometimes outside consulting services. They may be charged to the employer, plan participants or to the plan itself and the costs may be allocated on a per participant, per plan basis, or as a percentage of the program assets. For 2011, the total administrative and management costs on the 401 (k) plan are 0.78 percent or about $ 250 per participant. The Supreme Court of the United States decides, by 2015, that administrators of the plan may be sued for excessive expenses and plans, at Tibble v. Edison International. In the Tibble case, the Supreme Court took a strong issue with the big companies placing investment plans in the mutual fund's "mutual funds" as opposed to "institutional" grade stocks.
Top-weight terms
The IRS monitors defined benefit plans such as 401 (k) s to determine if they are too heavy, or weigh too much in providing benefits to key employees. If the plan is too heavy, the company should fix it by allocating funds to other employees (known as non-key employees) benefit plans.
Packages for a particular small business or sole proprietors
The 2001 Economic Growth and Reconciliation Tax Law (EGTRRA) makes 401 (k) plans more beneficial to self-employed. Two major changes are made in relation to the permitted deductive contribution of "Entrepreneur", and IRC-415's "Individual" contribution limits.
Prior to EGTRRA, the maximum tax reduction contribution to the 401 (k) plan was 15% of the eligible salary (less the amount of wage deferral). Without EGTRRA, a businessperson who receives $ 100,000 in salary will be limited in Y2004 with a maximum contribution of $ 15,000. EGTRRA raises the deductible limit to 25% of eligible payments without deductions for salary suspension. Therefore, the same entrepreneur in Y2008 can make an "elective deferral" of $ 15,500 plus a revenue share contribution of $ 25,000 (ie 25%), and - if this person is over the age of 50 - make a pursuit contribution of $ 5,000 for the total $ 45,500. For those eligible to make a "chase" contribution, and at a salary of $ 122,000 or higher, the maximum possible total contribution in 2008 would be $ 51,000. To take advantage of this higher contribution, many vendors are now offering a 401 (k) plan or Individual plan (k), which can be managed as Self Directed 401 (k), which allows investments in real estate, mortgage notes, rights tax lien, private companies, and almost all other investments.
Note: Unrelated business people are subject to slightly different calculations. The Government requires the calculation of profit-sharing contributions as 25% of net entrepreneurial income (Schedule C) . Thus, at $ 100,000 of entrepreneurial income, his contribution is 20% of gross self-employment income, 25% of net after a $ 20,000 contribution.
Rollovers as a start-up business (ROBS)
ROBS is an arrangement in which prospective business owners use their 401 (k) pension fund to pay for the start-up costs of a new business. ROBS is an acronym of the United Internal Internal Revenue Service for Rollover IRS ROBS as a Business Start-Up Compliance Project.
The ROBS plan, while not regarded as a cruel tax avoidance transaction, is questionable because they can only benefit one individual who rolls out the withdrawal of his 401 (k) pension into the ROBS plan in a tax-exempt transaction. The ROBS plan then uses rollover assets to buy new business stock. Company C must be established to roll out the 401 (k) withdrawal.
Other countries
Although the term "401 (k)" is a reference to the specific terms of the U.S. Internal Revenue Code Section. 401, has become so popular that it has been used elsewhere as a generic term for describing analogous laws. For example, in October 2001, Japan adopted a law allowing the creation of a "Japan-version 401 (k)" account although there is no relevant Japanese code provision actually referred to as "section 401 (k)."
Similar pension programs exist in other countries as well. The term is not used in the UK, where the analog pension arrangement is known as a private pension scheme. In Australia, they are known as pension funds.
Similarly, India has a scheme called PPF and EPF, which is loosely similar to the 401 (k) scheme, in which employees contribute 7.5% of their salary to a provident fund and this is matched by the same contribution by the employer. The Employees' Provident Fund Organization (EPFO) is a legal entity of the Government of India under the Ministry of Labor and Employment. He manages a compulsory Fund Provision Fund scheme, Pension Scheme and Insurance Scheme. This scheme includes Indian and international workers (for countries where bilateral agreements have been signed; 14 such social security agreements are active). It is one of the largest social security organizations in India in terms of the number of recipients covered and the volume of financial transactions conducted. EPFO's top decision-making body is the Central Supervisory Board.
Nepal and Sri Lanka have similar employee welfare schemes. In Malaysia, The Employees Provident Fund (EPF) was established in 1951 on the Employee Provident Fund Ordinance of 1951. The EPF is intended to help private sector employees save a fraction of their salary in a lifetime banking scheme, to be used primarily as a pension fund but also in things temporary employees or no longer fit to work. As of March 31, 2014, the size of EPF asset size reached RM597 billion (US $ 184 billion), making it the fourth largest pension fund in Asia and the seventh largest in the world.
Risk
Unlike the definite benefits of ERISA plans or savings accounts of banking institutions, there is no government insurance for assets held in 401 (k) accounts. Plan sponsors who are experiencing financial difficulties sometimes have funding problems. Fortunately, bankruptcy laws give high priority to sponsoring funding obligations. In moving between jobs, this should be a consideration by the plan participants whether to abandon the assets in the old plan or rolling the assets into new company plans or to individual pension arrangements (IRAs). The fees charged by an IRA provider can be much less than the fees charged by the employer's plan and usually offer a wider choice of investment vehicles than the employer's plan.
See also
- Australia's supit system
- Belgian pensioensparents
- Brazil and Portugal Fundo de pensÃÆ'Â £ o
- Canadian Registered Retirement Retirement Plan
- France's special retirement plan
- German Betriebliche Altersversorgung
- India Public Provision Fund
- Set of Malaysian Workers' Savings Account
- Mexican Pensioners Fund Administrator
- New Zealand KiwiSaver System
- Philippine Social Security System
- Singapore Central Provision Fund
- South African Government Employee Pension Fund and Financial Services Board
- Spanish Plan de pensiones
- British individual retirement and savings account
- United States
- Account Comparison of 401 (k) and IRA
- 403 (b)
- 457 (b)
- Self-directed IRA
- Vivien v. Worldcom
- Save Savings Plan, the contribution account assigned to federal government employees is operated similar to 401 (k)
References
External links
- 401 (k) information from the Internal Revenue Service
- 401 (k) Packages For Small Businesses from the Department of Labor
- 401 (k) in Curlie (based on DMOZ)
- 401 (k) Resources and Research from AARP, the Financial Industry Regulatory Authority, and the Pension Security Project
- American Savings Education Council, American Savings Education Council
- Retired Research Center, Retirement Research Center
- EBRI.org, Employee Benefit Research Institute, a non-profit and non-partisan organization.
- Wiserwomen.org, Women's Institute for a Secure Retirement
Source of the article : Wikipedia
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