When you work a job, you are entitled to many benefits including a retirement plan. Often, this is a 401(k) retirement plan. If you’ve never set up a 401(k), you should know what complications may arise so you can prepare for them.
Before you can reap the benefits of a 401(k) plan, you need to first meet all the qualifications. Some of these qualifications are simple. In general, you need to be 21 years old or older in order to be put on a company’s 401(k) plan. However, things get more complicated from there. Some businesses will require that you work for at least one year before you can qualify for the plan.
This can either be counted as you working exactly 365 days or you being at the company for 365 days regardless of how many you actually worked. Depending on the employer contributions made to your plan, you might need to work two years before getting a 401(k) plan. All these qualifications and requirements make it more complicated just to get started.
401(k) plans are meant to provide people with a means of saving money for their retirement. Many laws are put in place in order to make this fair. For example, plans have contribution limits and once you max out your contributions for the year, you can’t add more to your account.
Another way things are made fair is through non-discrimination testing. This testing makes sure highly-compensated employees (HCEs) aren’t disproportionately benefited and that everyone is equally and fairly being compensated. Non-discrimination testing can make it harder to set up your plan. Safe harbor plans can help you resolve discrimination issues in your plan.
A 401(k) plan can work differently for everyone. You have options for how much you will contribute and it can be complicated to understand the whole process. Understanding the contributions you will make is step one. Each plan has limitations on what you can contribute and the exact amount changes from year to year. It is your choice how much you will actually contribute. Some sources recommend contributing 10-20% of your salary. You may also want to contribute up to what your employer will match. Some people even choose to max out their accounts each year. Before you get started, you need to know what the best option for you is.
It can be difficult to get your 401(k) started, but if you know what to expect then things can be easier. Having a 401(k) is a great way to prepare yourself for retirement. You just need to get the ball rolling.
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