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How long can a company hold your 401k?
It’s tempting to say that you need to be sure that your company is going to continue supporting you into retirement. But most employers will stop offering their employees 401(k) plans after a set period of time. And even if they do, there is no guarantee.
What they will continue to pay their contributions.
This is a problem. The financial crisis has caused many people, particularly younger workers and those without much savings, to lose their homes and lose their ability to retire with some degree of comfort and security. This isn’t just bad for investors; it’s bad for everyone who relies on the employer’s retirement plan for financial security.
Even if you don’t want to work for another employer, it’s very hard to find someone else who does. And if you’re already an employee of another company, you’re out of luck too.
If this happens with your 401(k)s, or with any other pension or retirement account–however old or otherwise–it may be time to revisit all of your planning assumptions about how long your money can last in the event of an emergency or unexpected drawdown on your account balance.
You’re in a position where you need a strong plan that you can rely on in the event things go wrong, but there is no guarantee that things will go right in your future job searches and livelihoods either.
Disadvantages of Working for a Bad Employer
The 401(k) retirement savings plan is a popular way to save for retirement. This article will explain the various factors that determine how long can a company hold your 401k? retirement plan.
The amount of contribution you make towards your 401k can be one of two things: an automatic, yearly contribution, or an elective, discretionary contribution.
The first option is often called the “401(k) automatic” contribution, and this is generally entered into automatically as part of your paycheck. The second option is called the “401(k) elective” contribution, and this is generally added at the beginning of each pay period to see what amount you should contribute.
I’m sure most people are familiar with their employer’s 401(k). If you’re involved in a company pension plan, it may look like a series of checkboxes and amounts:
- The amount of contributions made by employees through their employers (the “automated” contributions),
- The amount of contributions that employees choose to make (their “elective” contributions), and
- The amount of matching contributions employers give up as part of the overall financial structure (the “matching” contributions).
Reasons to Work for a Good Employer
In the US, it is a matter of public record that more than half of all 401(k) and other retirement plans are held by employers. Companies have a tendency to think little about how long their financial and pension plans can last. While this may be understandable from a strategic perspective, it can actually be bad news for employees if they are forced to work longer hours or have the company buy them out.
A recent study by Harvard Business School found that despite their long life expectancy, firms with larger 401(k) plans tend to pay higher wages than those with smaller ones. This is because large plans provide more room for manoeuvre in case crisis strikes — such as downsizing — and are thus able to cut wages without taking out a loan on a rainy day.
A report by the Washington Post suggests that while Congress wants to help people save for retirement, they don’t want them to have enough money in their accounts so that they will spend it on things like blow-drying their hair and buying round trip tickets to Las Vegas.
What’s your thought on this? Would you like your employer to hold onto your 401(k) for as long as possible? Or do you feel that you should be allowed some flexibility with regard to how much time you are allowed from work?
How to Know if Your Employer is Bad or Good
The 401(k) is a retirement savings plan offered by many employers. The amount of contribution you can make to your company’s 401(k) varies from company to company, but generally, it is some percentage of your salary. Here are some things to consider when deciding whether your employer’s 401(k) plan is good for you:
- Your employer’s mandate: Your employer must offer a 401(k) or similar retirement savings plan (like a 403(b) or IRA). You can choose how much money you contribute to your employer’s 401(k), and it depends on the type of plan.
- The number of contribution limits: The amount of money that you can contribute to your employer’s 401(k) varies depending on the type of plans offered by your company, and they also depend on the company’s other sources of retirement savings, like 457 plans and individual retirement accounts (IRA).
- The percentage match on contributions: Sometimes, employers offer a higher match rate than what is required by law. However, this usually means that the minimum per cent you contribute each year will remain low and you may have to pay more for other types of contributions, such as cash-out college savings accounts and IRAs. The more generous match rates are often only available for very long-term plans with high levels of employee turnover, so this isn’t always an advantage.
- Tax consequences: Depending on your filing status, the tax rules about deducting contributions to your 401(k) may also be different from state to state. It is important that you do not add any taxes to the amount you contribute ($5,500 in 2016). It should be noted that if you want to take advantage of automatic deductions at tax time (rather than make it an extra payment), then add $5,500 in taxes this year.
- The availability of tax-free funds: If after all these considerations the value per dollar contributed remains just over $30 or less per year; then I would say it makes sense for someone with income under $100K or $15 per hour tax-free salary to move onto another job where they can save more while still contributing more than they would in their current job through a 401 k plan. Such employers tend to have lower employee turnover than larger companies; so employees tend not only to stay longer with those employers but also receive higher wages per hour worked which means they have more disposable income
The Importance of Saving for Retirement
The 401(k) is a new but fairly common retirement savings vehicle. There are several reasons why this is so important, including:
- Employers want to use retirement savings as the primary funding source for their company’s pension plan.
- The standard of living in the US is generally higher than in other countries. In other words, an American who gets a raise at work will be able to save enough money over the course of their working life to retire well before they turn 65.
- If you are self-employed, you might have your own retirement plan.
In fact, because it’s so common, it’s worth noting that: 1/3 of Americans do not have any savings whatsoever and are relying on Social Security for their retirement income (see this post for more on how to make sure you’re contributing enough to keep yourself from running out of money).
The 401(k) is a vital tool for your company and its employees. It provides them with access to a wide range of financial services, allowing them to retain control over their finances when they go out of business or retire as they can manage their assets strategically and make decisions about how much they contribute each year.
The standard of living in the US is generally higher than in other countries. In other words, an American who gets a raise at work will be able to save enough money over the course of their working life to retire well before they turn 65.
If you are self-employed, you might have your own retirement plan. Having access to all these tools allows your company’s employees (and yourself) peace of mind about where your money comes from and how long it will last if you lose your job or need some help with expenses during retirement.
But there’s one thing I would like to mention since I think it is absolutely critical: not having a quality 401(k) plan can potentially ruin your whole career if you have no choice but to work for someone else after leaving the company (or worse yet, depending on the circumstances).
It may seem impossible that this could happen but there have been studies that show that even if most people don’t know what is going on with their 401(k), somewhere around 40% do — so they’ll often take advantage of anything they can find regarding possible problems with the way things are handled at work (e.g., “I was told my 401(k) was frozen! Can I get my money back?”
Conclusion
In the US, there are a number of different ways to contribute to one’s 401(k): traditional, Roth and SEP. To our knowledge, only one of them is 100% tax-deductible.
The tax deduction is important because it allows you to take your money out at any time without penalty and still have a significant amount intact in your 401(k) account. The contribution limit is also important because it forces you to put more money into your 401(k) account as compared to other alternatives.
The tax deduction is not the only factor that might influence how long a company can hold your retirement savings after leaving a job. The bigger issue might be the amount of contribution that takes place.
In some cases, companies offer a higher 401(k) contribution than what you will see on the company’s website. This means that if you leave early, you might end up contributing less than this amount than what was advertised on their site.
In other cases, companies offer an equivalent amount of contribution as well as a lower penalty for early withdrawal (not taking money out unless earlier than age 59 ½). So, depending on when you leave the job and what they offer in terms of contributions and penalties could change things.
To illustrate: let’s say we have worked with a company that offers an identical $15,000 contribution (which is also tax-deductible), but also has a penalty for early withdrawals (a penalty which can be reduced by yourself through contributions to your plan).
If we leave this employer after 2 years (at age 58), we will be contributing $20,000 for the year; if we leave after 5 years (at age 55), this will be $25,000; and so forth for years 3-5 until the year 2028 when we stand at $40,000 in contributions!
Clearly, there are issues here: What if we want to retire somewhere else? Are there any additional taxes imposed on us when transferring funds from one company to another? How much would it cost us to move our assets abroad? Where do we get our retirement income in case something happens suddenly? These questions must always be considered by every employee who wants to save for retirement.
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