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401k

  • Date Submitted: 05/21/2013 04:22 PM
  • Flesch-Kincaid Score: 57.5 
  • Words: 532
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A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.
A 401(k) replaced Pension Plans which were managed by the employer and they paid out a steady income over the course of the retirement. But as the cost of running pensions escalated, employers started replacing them with 401(k)s.
While a 401(k) can help you save, it has plenty of restrictions. In most cases, you can’t tap into your employer’s contributions immediately. Vesting is the amount of time you must work for your company before gaining access to its payments to your 401(k). (Your payments, on the other hand, vest immediately.) It’s an insurance against employees leaving early. On top of that, there are complex rules about when you can withdraw your money and costly penalties for pulling funds out before retirement age.  
Some employers offer immediate vesting of their matching contributions, it is more common that their rules will cause employees to vest according to a pre-determined schedule. Since employees vest based on the amount of time they have been with their employer, for practical purposes this means you typically won’t be able to quit Friday and take the matching contribution money you received Thursday.
There are two kinds of vesting schedules: graded vesting and cliff vesting.
With a graded vesting schedule, you vest in your employer’s contributions on certain anniversaries of your employment. If your employer uses a graded vesting schedule, it may be more generous than the one described below, but thanks to the Pension Protection Act of 2006, it can’t be less so:
• After one year of service: 0% vested
• After two years of service: 20% vested
• After three years of service: 40% vested
• After four years of service: 60% vested
• After five years of service: 80% vested
• After six or more years of service: 100% vested
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