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10 Things to Know about Your 401k

Since employers seldom offer a straight pension plan, 401(k) plans have gained in popularity over the past decade. Simply put, these plans are defined contribution plans that are employer based. The plans allow employees to contribute money before taxes. For those who are self-employed, if they have no employees, they may also set up a 401(k) plan where they can add funds on a pretax basis. Your 401(k) plan is an important part of your overall retirement financial planning. Here's what you need to know about your 401(k):

Contribution limits

Blog 10 Things to Know about Your 401kFor 2016, employees may contribute $18,000 to their 401(k) annually. Employees who are over the age of 50 may contribute an additional $6,000 as a catch-up contribution.

Tax breaks

Taxable income is reduced because you're contributing on a pre-tax basis. If you earn $5,000 a month ($60k annually) and contribute $1,000 monthly to a 401(k) your taxable income drops to$48k annually.

Potential for "free money"

Some employers will match a portion of the funds you put in a 401(k) plan. Many employers offer up to six percent matching funds which helps you grow your retirement savings.

Plan vesting matters

While the funds you have taken from your salary and are put into your 401(k) are automatically yours, the funds your employer deposits typically have a "vesting" schedule. This means you have to review your plan documents to determine when the additional funds actually belong to you.

401(k) penalties

You should be aware of when you can withdraw funds from your 401(k). If you leave your job, you have to roll the funds over to another account (or leave them) or risk paying an early withdrawal penalty.

401(k) loan possibilities

There are some cases where your 401(k) has a loan provision allowing you to borrow money without penalty. There are different conditions to these loans so read your documents carefully.

Grasping the impact of fees

Most 401(k) plans offer a number of investment options. Additionally, there are typically annual fees. Evaluate your choices and costs of your choices or your savings may be far less than you expect.

Consider a Roth 401(k)

Even those who have a standard 401(k) plan may be offered a Roth 401(k) through their employer. These plans allow you to save more money and are funded with after-tax dollars. In these plans, withdrawals and growth are tax free.

Understand rollover options

If you change employers or you retire, you may roll over the funds in your 401(k) into a qualified plan. Make sure you do not co-mingle the funds with a standard IRA or there may be tax consequences.

Required distributions

Your 401(k) plan must be included in your required minimum distribution calculations or you could face penalties of up to 50 percent of the amount that should have been withdrawn.

Whether you have an existing IRA or Roth IRA plan or you're considering starting a plan, contact a Member Financial Representative at Oklahoma Central Credit Union by calling 918-664-6000. Even if you have an employer-based 401(k) plan, it may be insufficient to fill your needs in retirement.

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