OCR Text |
Show ISRM 1 401 (k) increasing in popularity were very bad, a person could lose money and have less to take out than he originally contributed. However, some 401(k)s allow the employee more choices of how to invest the money fixed income, equities, etc. than pension plans allow. jJ; When it comes to retirement planning, people traditionally have thought of pension plans and individual retirement accounts, i There is another option that is becoming be-coming increasingly popular . the 401(k) plan. j Like an IRA, a 401(k) plan en-j en-j ables an employee to put away a portion of his income for his retirement re-tirement and to avoid paying income in-come tax on the principal and on ! the income it earns until he begins : withdrawing it at retirement age. S However, there are some differ-, differ-, ences between the two plans. With i an IRA, a person can contribute only 12,000 per year - $2,250 per couple if the spouse doesn't work. w'th a 401(k) plan, an employee ; n contribute as much as $30,000 jr year, according to John R. Rockwell, vice president of T. Rowe Price Associates, a designer and manufacturer of 401(k) plans. Unlike IRAs, most 401(k) plans permit withdrawals for certain purposes, which may include children's chil-dren's education and home purchases. pur-chases. A person must pay penalties penal-ties on pre-retirement withdrawals withdraw-als from an IRA. Like pension plans, 401(k) plans are set up by employers to help their employees plan for retirement. retire-ment. Pension plans are defined benefit plans that is, they guarantee guar-antee a fixed benefit to the retiree. re-tiree. They usually are funded entirely en-tirely by the employer. However, many companies have dropped their pension plans for two different reasons: either the the company couldn't afford to put away the required sums needed need-ed to fund the plan, or the compa ny had overfunded the plan and wanted to get its hands on the excess ex-cess cash for other corporate uses. Many companies have replaced their pension plans with 401(k)s. Rockwell estmates that 80 percent of the Fortune 500 companies have 401(k) plans in effect, as well as thousands of smaller companies. With the 401(k) a defined contribution contri-bution plan the employee must contribute a portion of his salary, and the employer may or may not match it with a contribution up to a specific limit. Those contributions contribu-tions are invested to earn interest on the money. The employer does not guarantee guaran-tee a specific benefit amount at retirement. That is determined by how much is contributed and by how well the funds are invested. Potentially, if the investments |