Your 401(k) – What's New

Posted at 8:57 PM, Dec. 20, 2006

In 2006 some large companies put in place a new policy – each employee hired was automatically signed up for the company 401(k) plan with 3% of their pay being set aside in a 401(k) investment account.  Employees could opt-out, but if they did not take the time to say "No, thanks," they were in.

Uncle Sam took a look at the practice and said, "OK by me," or official IRS words to that effect.  As reported on the website of Cooley Godward Kronish LLP, "The IRS recently ruled that a 401(k) plan may require mandatory 401(k) contributions to be withheld from eligible employees' compensation, if the employer gives appropriate notice to its employees and the employees have an opportunity to 'elect out' of the mandatory contributions."

So now folks will have help saving for retirement in the most painless way possible…the money is deducted before taxes so they never see it, and, contributions grow tax free until withdrawal. When you consider that many companies have a policy of matching employee contributions, a 401(k) can be the best way to save for your future. 

And if that future – in the near future – includes buying a home?  A 401(k) can help there, too.  The IRS says, "… depending on the rules for your 401(k) plan, you may be able to borrow money from your 401(k) plan to purchase your first home. Your plan administrator should have written information about your particular plan that explains when you can borrow funds from your 401(k) plan…."  You will need to talk to the administrator to find out how your plan works. Generally, you pay interest on the loan but you pay it to yourself – the interest goes back into your account and replaces the earnings you might otherwise get on the investments.  Provided you pay back the loan, the money you borrow is not taxable. 

With automatic investment, and help buying that first home, a 401(k) account could be the best decision you don't make all year!

Now this is important:  Always talk to your tax/financial advisor before taking a loan from your 401(k), or before making any change in your retirement planning.  This article is not intended to give any legal, financial, or tax advice, and does not cover all possible restrictions or regulations related to 401(k) plans or other investments.  Always speak with your investment and/or tax advisor before making any decision based on information in this, or any other, source.