A 401(k) Plan is a qualified deferred compensation plan which enables you to save money, lower taxes, and invest in your financial future. Under a 401(k) plan, your elective contributions are made on a before tax basis; that is, the amount deferred will be excluded from your taxable income. This may currently lower your taxes. The following are some advantages of our 401(k) plan.
- Elective deferrals are voluntary and the amount you contribute is up to you. (Federal law limits the deferral see the table below).
- Deferrals are made before tax; therefore, you pay less in Federal and State income taxes
- Earnings and income are not taxed until the money is distributed from the plan. When you receive your retirement benefit you may be in a lower tax bracket than you are currently.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) increases opportunities for individuals to save for retirement. Many of these opportunities began in 2002 and phase in over a number of years. Below is a list of some of the major changes affecting retirement savings.
Increased 401(k) Contribution Limits
In 2004, the 401(k) contribution limit rose to $13,000 (and will continue to rise, reaching $15,000 by 2006). In addition, the "15% of compensation limit", which, prior to 2002, required companies to limit the contributions of most 401(k) participants so that total contributions company-wide would not exceed 15% of the company's payroll, was repealed. As a result, instead of limiting employee contributions to any specific percent of pay, companies are able to let their employees contribute any percent of pay, up to the maximum amount specified for that year ($13,000 in 2004). In addition, workers over age 50 are now permitted an additional $3,000 catch-up limit in 2004.
Note that special contribution limits may apply to employees who earn more than $90,000 a year or who are partial owners. Due to anti-discrimination rules intended to prevent highly compensated employees and owners from disproportionately benefiting from the 401(k) plan, this group of employees may not be permitted to contribute the full $13,000. Contribution limits for this group will vary by company depending upon circumstances such as the participation rate among employees earning less than $90,000.
Schedule of 401(k) contribution limits: |
Schedule of IRA contribution limits: |
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2002: |
$11,000 |
2002: |
$3,000 / $3,500 |
2003: |
$12,000 |
2003: |
$3,000 / $3,500 |
2004: |
$13,000 |
2004: |
$3,000 / $3,500 |
2005: |
$14,000 |
2005: |
$4,000 / $4,500 |
2006: |
$15,000 |
2006: |
$4,000 / $5,000 |
| 2007 and thereafter 1 | $15,000 (adjusted for inflation in $500 increments) | 2007: |
$4,000 / $6,000 |
1 The 401(k) contribution limits will be returned to the 2001 level on January 1, 2011 unless Congress extends the increased limits beyond that date.
401(k) Catch-Up Contributions for Workers over Age 50
Employees who turn age 50 or older within the end of the plan year are permitted to make "catch-up" contributions that exceed the regular 401(k) contribution limits. They can make a catch-up contribution of up to the lesser of: (1) $3,000 in 2004 (for a total limit of $16,000) increased by $1,000 per year up to $5,000 in 2006 (indexed in $500 increments thereafter) or (2) 100% of pay less any other elective deferrals for the year.
Please note that your employer is not required to allow catch-up contributions.
Temporary Tax Credit for Low and Middle Income Savers
A tax credit of up to $1,000 is available to some taxpayers depending on income. Workers eligible for this tax credit are single taxpayers with an adjusted gross income (AGI) of $25,000 or less, taxpayers filing as heads of household with an AGI of $37,500 or less, and taxpayers filing jointly with an AGI of $50,000 or less. The credit equals 10 – 50% for each $1.00 you contribute to your plan or IRA, up to the first $2,000. This tax credit only lasts through 2006 and applies to people age 18 who are not claimed as a dependent by another taxpayer. Note that this tax credit also applies to 401(k) plans, IRAs, 403(b) plans, and 457 plans, with the total tax credit not to exceed $1,000 across all plans.
Increased Pension Portability
You now have the opportunity to rollover balances between various types of qualified plans. Rollovers are now permitted between 401(k), 403(b) and 457 plans. Note that it is up to individual employers to decide which types of rollovers they accept. You should consult your employer for specific details about what types of rollovers are permitted.
Faster Vesting
The employer matching contributions to your defined contribution plan(s) is now required to vest as rapidly as: (1) 100% vested after three years; or (2) 20% vested after two years with an additional 20% vested each year until 100% vested at six years.
Decreased Suspension Following Hardship Withdrawal
Participants who take a hardship withdrawal from their plan are now prohibited from making contributions for 6 months, reduced from a 12 month suspension period.