Retirement Plan FAQ

Questions:

• What is a qualified retirement plan?
• Why are 401(k) plans so popular?
• What is a Keogh plan?
• What does it mean to be "vested" in my retirement plan?
• Is an IRA a retirement plan?
• Can people who work for a company and own their own business have a retirement plan both at work and through their small business?
• Is my retirement plan protected from creditors?

Answer:

Why are 401(k) plans so popular?

401(k) plans are popular with employers because they are less expensive than other types of retirement plans. Contributions constitute the biggest expense for an employer. But in the case of a 401(k) plan, the bulk of the contribution is typically made by the employee -- through salary reductions. The employee diverts into the plan a portion of the salary he or she would otherwise receive in cash.

401(k) plans are popular with employees because the plan allows them to save for retirement while simultaneously reducing their current income tax bill. Employees don't pay income tax on salary deferrals until the money comes out of the 401(k) plan, some time in the future. And employers usually allow employees to change the amount of salary deferred into the plan as the employees' circumstances change. Also, employees are often permitted to make their own investment decisions, and are frequently given access to their retirement funds through loans or hardship withdrawals. (For more on loans and hardship withdrawals, see Getting Your Retirement Money Early -- Without Penalty.)