How Does a Retirement Plan Contribution Work?
Individual retirement account contributions are unlike those of traditional retirement or investment plans that have a set dollar amount that an investor contributes. Instead of a specified dollar amount, these contributions are based upon percentages of income. Under Federal guidelines, a contributor can set aside a percent of his or her salary in a before-tax account. This means that the money you contribute reduces your taxable income. An additional percentage of income can be placed into an after-tax account that will earn dividends but has no effect on your taxable income. In most cases, the minimum contribution is set at 3 per cent. However, some companies may have different requirements for the minimum contribution.
One thing to consider when you set up your retirement account contributions is that most employers only match contributions that go into the before-tax portion of your plan. Even if you contribute to the maximum percentage set by the federal government, some employers only match contributions up to 3 or 4 per cent. That doesn't mean you shouldn't contribute the maximum - it is a tax benefit, after all. However, it means the employer will not match any contributions above their maximum. Let's say for example that you are contributing 6 per cent before tax and 6 per cent after tax into a safe harbor 401 k plan. If your employer has 50 per cent match contributions up to a maximum of 4 per cent on a before tax basis, that means the employer will contribute 50 per cent of what you contributed on the first 4 per cent of your retirement contributions in your before tax account.
Although you can only withdraw funds from your plan from the best 401k provider before retirement age for emergency reasons, you have the option to borrow against it if your employer allows for that. The interest rate you will pay for the amount borrowed is quite low. However, you will be paying it to yourself rather than to a bank. In addition, the money comes out of your paycheck. Therefore, you will not be tempted to not repay the money you borrowed against your retirement plan contributions. Some companies only allow you to borrow against you're the contributions you actually made. Check your company's guideline to know whether you are eligible to borrow from your plan and if so, how much you can borrow.
There are various retirement plan contributions in the market. You should research well to know which one will work for you. There are related discussions on this at http://www.huffingtonpost.com/jim-t-miller/how-to-pick-a-financial-a_b_4666262.html.