What is a 401(k) Plan?

Under this arrangement, a participant may choose to receive compensation currently or to defer receipt by directing their employer to contribute an amount to their account with the 401(k) plan.  The amount deferred, along with any investment earnings that may accrue, are not taxed until their withdrawal from the plan.  In addition to the tax advantages, the 401(k) provides a systematic method for accumulating retirement savings.

How do I contribute and what are the limits?

Contributions are made by payroll deduction based upon the amount you specify.  You can change the amount deducted periodically.  The maximum can be up to 10% of compensation subject to an annual dollar limitation.  For 2004, that dollar limit is $13,000.  Catch-up contributions for individuals age 50 and over is $3,000 for 2004.

What will be the effect on my take-home pay?

Because 401(k) contributions reduce current taxes, the net effect on take-home pay will depend upon the contribution level you have selected and your tax bracket.  Table A offers some guidance assuming a 5% contribution to the 401(k).  For example, a single participant earning $3,000 per month will be investing $150 each month, but net take-home will be reduced by only $108.00.

What can I hope to accumulate in my 401(k)?

The consistent deposits into your tax sheltered account can result in significant retirement funds.  The exact amounts will depend upon investment performance, but assuming a steady 8% annual return, Table B provides estimated future balances.  For example, the person contributing $150 per month would accumulate $88,353 over 20 years.  

Can I  choose from different investment options?

Yes, you can spread your investment across a number of investment options.  This will allow you maximum diversification across different financial markets.  You can change the allocation mix periodically and will receive regular performance updates.

When do I have access to my account?

You are always 100% vested in any 401(k) contribution you make.  However, federal regulations restrict distributions until you reach age 59½ or terminate employment, unless you qualify for a "hardship" distribution.  Furthermore, a 10% excise tax is imposed upon all distributions made prior to age 59½ which are not rolled into an IRA.  This tax is waived if you have become disabled.

Will participation in the 401(k) affect my ability to make tax deductible contributions to an IRA?

Deductible IRA's are limited if either you or your spouse is an active participant in an employer sponsored retirement plan and you have adjusted gross income in excess of:

• $65,000 - Joint Return for 2004
• $45,000 - Single for 2004
• $0 - Married and Filing Separately for 2004

The IRA deduction decreases as income exceeds these amounts until the excess is over $10,000 and the deduction is zero.  You are an active participant in the 401(k) if you elect to make deferrals or receive an allocation of employer contributions.