According to Ted Benna, often referred to as the Father of the 401(k), the typical wealth held in an American family’s 401(k) has more than quadrupled since the program’s inception with 43% contributing as of 2021 versus a much smaller 8% in 1980.
With many Americans living on average 10 years more than they did when the 401(k) was created in 1978, it’s more important than ever to understand what a 401(k) is and the impact it can have on your paychecks and future savings. In this article, we’ll define the top 11 terms you need to know to navigate your 401(k) plan.
1. 401(k)
A 401(k), named after the section of the Internal Revenue Code that governs the plan, simply put, is a retirement savings account. If you elect to contribute to a 401(k) plan, the percent you choose will be automatically deducted from your paycheck each pay period.
The money can be taken out of your paycheck before your taxes are paid (Pre-Tax 401(k)) or after taxes (Roth 401(k)). Your contributions will then be invested at your discretion into one or more funds provided in the plan.
2. Employer-Matching Contribution
Employer-matching contributions are when your employer adds money to your 401(k) based on how much you contribute. Mazzella Companies matches 100% of plan participant contributions that do not exceed 2% of gross pay plus 50% of contributions that do exceed 2% of gross pay but do not exceed 6% of gross pay.
For example, if your annual salary is $50,000 and you’ve chosen to contribute 3% to your 401(k). Your contribution will be $1,500 ($50,000 x 3%) per year. Mazzella Companies will contribute a total of $1,250 ($1,000= 100% on the first 2% + $250=50% of the 1%). When you add what you’ve invested to what Mazzella Companies invests, your yearly contribution will total $2,750.
Related: What is the 401(k) Plan at Mazzella Companies
3. Pre-Tax 401(k)
Under the Pre-Tax 401(k) plan, plan participant contributions are placed into a retirement savings account before federal income taxes are taken out of their paycheck. Therefore, federal income taxes on contributions are postponed until funds are taken out or a plan participant begins to receive plan distributions.
Additional tax implications should be considered if a plan participant decides to receive plan distributions from a Pre-Tax 401(k) before the age of 59 1/2. If a plan participant has a Pre-Tax 401(k), an additional 10% tax will be owed on those distributions. If they are older than 59 1/2, they will only need to pay income tax.
4. Roth 401(k)
With a Roth 401(k) plan, the money is subject to federal income taxes in the year of the deferral, which means a plan participant is contributing money to their retirement savings account after taxes have been taken out of their paycheck. In many cases, this will result in them not needing to pay federal income taxes on this money when they take out funds or begin to receive plan distributions.
Taxes on distribution payments from a Roth 401(k) for plan participants under the age of 59 1/2 are unnecessary unless the plan participant has had the Roth 401(k) account for less than five years.
5. Plan Participant
A plan participant is any Mazzella Companies team member who is enrolled in either the Pre-Tax 401(k) or Roth 401(k) plan that Mazzella Companies offers and has the right to receive benefit payments from that plan. A plan participant can mean either a working or retired team member.
6. Vesting
Vesting means ownership. This means that each team member will vest or own a certain percentage of their account in each plan year. A team member who is 100% vested in their account balance owns 100% of it, and Mazzella Companies cannot take it back for any reason.
You are always 100% vested, or entitled to all of the amounts, in your accounts made up of:
- Salary deferrals including Roth 401(k) and Catch-Up Contributions
- Safe Harbor Contributions
- Rollover contributions
7. Rollover
A rollover contribution is when a team member has a prior 401(k) account from a previous employer that they would like to “roll over” to their new 401(k) account at Mazzella Companies. “Rolling over” your account into a 401(k) at Mazzella Companies should only be done after consulting with qualified counsel. They’ll need to determine whether the rollover is in the team member’s best interest. If a new team member chooses to roll over a plan, they will always be entitled to all amounts in their rollover account and rollover contributions even if they leave or are terminated.
Related: Why Would You Want to Come Back to Mazzella Companies?
8. Safe Harbor Contribution
Safe harbor contributions are the percentage match made by an employer to a plan participant’s 401(k) account. At Mazzella Companies, plan participants own 100% of any of the contributions that are considered a match by the company outside of any profit sharing. This starts the same day they contribute to their 401(k) plan.
9. Loan Distribution
Currently, employed plan participants may be eligible to take a loan out of their 401(k) plan. Varying factors affect eligibility, and the plan administrator will review those factors.
10. Hardship Distribution
If a currently employed plan participant has immediate and heavy financial need, they can apply for a hardship distribution in the amount needed to satisfy that financial need. A hardship distribution will pay for qualifying expenses such as:
- Medical care expenses
- Costs directly related to purchasing a principal residence
- Funds needed to prevent eviction or foreclosure
- Tuition
- Family funeral expenses
- Home repairs due to catastrophic events
11. Catch-Up Contribution
If a plan participant is at least 50 years old or will be so before the calendar year is over, then they may elect to contribute additional amounts called “catch-up contributions”. The maximum “catch-up contribution” that you can make in 2024 is $7,500.
These additional amounts may be contributed regardless of any other limitations on the amount that they can contribute to the plan. That means if you are over the age of 50 and plan on using a “catch-up contribution”, then your yearly contribution can be up to $30,500 in 2024.
