Ask anybody to define financial planning and you’ll probably be met with a definition including some mention of budgets and the share market. However, financial planning extends far beyond that. Financial planners can also help you with your retirement as part of their varied services. During retirement, as you probably already know, you get little or no income from any source other than your savings (or possibly a pension). Many Americans underestimate the power of financial planning when saving for their retirement, and others just completely miss the point altogether, not putting in any savings and hoping to rely on a pension. However, life is much better when you are retired if you have money coming in from what is called a 401(k). A 401(k) is a retirement savings plan that allows a worker to have the savings invested and defer the income taxes on the saved money until withdrawal.
Similarly, the new style ‘Roth 401(k)’ accounts allow savings to still be deposited with income taxes being taken out of the savings in the year that the money was earned, rather than at withdrawal, which is likely to be some time down the track, usually at retirement. 401(k) accounts are usually employer sponsored, meaning that the employer usually manages the 401(k) accounts of his or her employees. The term ‘401(k)’ refers to the section of the Internal Revenue Code of the United States establishing the provisions dealing with these types of retirement savings accounts. There are different names for retirement savings accounts for non-profit organization workers and government employees – 403(b) and 457(b) respectively. There is a limit on the amount of employee money that can be diverted into a 401(k) with deferred income tax obligations. This limit, known as the ‘401(k) limit’, increases every year. In 2009 the limit was $16,500 and the limit remained the same for the 2010 tax year. Although 401(k) plans are essential in planning a financially stable retirement, many employees are not aware of the benefits that they bring, or are too confused about the system to take advantage of them. For this reason, regular consultation with financial planners is important!
