This one however is a defined contribution, so between you and your employer, there are rules that dictate how much you can put into the program. It doesn’t say what the benefits going to be, but it does tell you what the contributions are going to be. Why would you invest in a 401k anyway? Because of tax benefits. 401k is the section of the internal revenue code that talks about these kinds of dollars. One day is the section of the Internal Revenue Code that talks about these kinds of dollars. So it’s the house if you will, that your money lives in, that the IRS looks at as a tax benefit, so you get to tax the dollars that are put in there. In addition to the deduction you also get interested in there, that’s deferred, so you don’t get to deduct any of the interest. You do get to use it until later but it doesn’t actually have to get tax until you actually take it out. Those are two big reasons why you put money into the 401 K.

Banks, mutual fund companies, brokerage houses other financial institutions as well as insurance companies provide the underlying tools inside the 401k that will offer you the opportunity to earn interest. Your employer decides what going to be in this plan, they can decide whether they have stocks of the corporation in there, they can decide not to, they can decide whether it’s only going to be mutual fund and only mutual fund families are going to be part of the plan, they can decide to have it an open architecture. All that is driven by a Summary Plan Description created once these decisions are made. Some of these plans are presented to you when you join us for employment. You get your health benefits, you get your conduct how you’re supposed to act it work where you can smoke if you’re a smoker. You get all that information and what your expectations is. You also get a summary plan description on the 401k, you can decide to participate or not participate.

This here defines all the rules the employer has set up complying with the IRS rule book, with respect to their specific plans. An employer can also opt to have a safe harbor inside their plan. This is an option that created a lot of the employer to deduct more money. Now, this is good for you, because if the employer makes a contribution and it’s discretionary on the part, but if they make a contribution it’s 100% vested by you and they get a bigger deduction, but it goes into your account. There a couple of rules right there, and again it’s just additional money that the employer can put into the 401k for your benefit.

In 2011 if you’re under 50 and a half, you can drop $16,500 in your 401k and deduct every one of those pennies or dollars from your tax returns. The nice thing about 401k is every time you make a contribution it’s deducted right away. Every two weeks, let’s say if you get paid you make $100 and you put in $10 you’re only going to get tax on that 90, that’s going to carry on through as long as you a participating in the plan. If you are over 50, you can add $5,500 for a total of 22,000 and its call the catch-up provisions, and they allow those older folks to then make an additional contribution to their 401k to make sure they have enough money at retirement.

We’re close to 2012. I wanted to throw this number out there for you, but it’s 2012 the maximum contribution in a 401k goes up as it does every year $17,000. Underage 50 your employer, if they have a safe harbor plan, here are the rules. They can put up to 100 percent of your pay into a 401k as a contribution on your behalf. Let’s go back to the example. If you made her 65,000 dollars last year, the employer could not put all hundred sixty-five thousand into the plan for you, they would cap that out. Its 100 percent of your earnings not to exceed $49,000 that does include, so those that $5,500 of catch up the provision of you, those over 50 and a half don’t get extra benefit if the employer is contributing. 59 and a half rule apply, what this means is that if you try to get money out of your 401k before 59 and a half you’re going to get not only text on those dollars to cause they have never been taxed, you’re going to get to penalize as well of 10%. That can be a substantial decrease with respect to what you end up with taking these dollars out. Examples of where would apply is if you took the money out and wanted to buy a car or put you kid trough college in or something of that nature, there are ways to get money out of the 401k. It’s beyond the scope of this particular lesson and we will address them in later sections here. But right now any basic things that you want to spend this money on other than retirement, is going to get penalized 10% plus tax, whatever tax rate you’re at the time you take the distribution.