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Should You Switch to Whole Life Insurance?

The 401(k) plan is solidly entrenched as the most popular retirement plan in the workplace. According to the Investment Company Institute, an estimated 43 million workers were participating in 401(k) plans in 2004 and total assets had neared the $2.1 trillion mark. Over the last decade, the 401(k) plan has outpaced every other type of employer-sponsored plan. Now several new “options” for 401(k) plans are enhancing the existing benefits.

Basic premise: In the typical 401(k) setup, an employer allows participating employees to contribute part of their salary to the 401(k) plan. Each employee determines the amount he or she will contribute to the plan, within certain limits. (The maximum dollar amount allowed for 2006 is $15,000.) Then the funds are invested on behalf of the employees. Because the money is set aside on a regular schedule (e.g., amounts are deducted from your paycheck), this is a relatively painless way to plan for retirement.

Although an employer is not required to provide additional funds, it may choose to do so in a matching plan (e.g., contributing 50 cents for every dollar deferred). In any event, an employee may be able to set aside a sizeable amount for retirement. Of course, there are no guarantees as to investment earnings, but the contributions may accumulate on a tax-deferred basis over time.

Furthermore, “catch-up contributions” are permitted for employees who are age 50 or older. For example, in 2006 you can add up to $5,000 more to the pot if you qualify.

Key point: A 401(k) plan must benefit employees in general. It may be disqualified if highly compensated employees contribute a disproportionately higher amount than lower-paid employees. In general, withdrawals from the plan can be made when an employee separates from service or due to death or disability. Otherwise, withdrawals made before age 59½ are generally subject to a 10% tax penalty plus regular income tax.

In the last few years, a few new features have increased the viability of 401(k) plans for employers and employees. This includes the following:

*“Solo” 401(k) plans for small businesses have increased as administrative costs have been reduced.

*An employer may institute an automatic enrollment program to ensure that the company meets certain participation requirements under the law.

*Safe-harbor plans have been designed to reduce the strict compliance burdens facing employers. These plans allow you to bypass complex testing procedures and permit highly compensated employees to maximize their contributions.

*A new Roth IRA (individual retirement account) feature may be added to an existing plan that enables 401(k) plan participants to make qualified distributions free of any income tax. This new feature—called the Roth 401(k) plan—first becomes available on January 1, 2006 (although the tax law provision authorizing this plan was enacted in 2001).

In conclusion: Obviously, there are numerous options to choose from. Obtain advice for your company as well as your pl situation.

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	[ return to list ] Should You Switch to Whole Life Insurance? The 401(k) plan is solidly entrenched as the most popular retirement plan in the workplace. According to the Investment Company Institute, an estimated 43 million workers were participating in 401(k) plans in 2004 and total assets had neared the $2.1 trillion mark. Over the last decade, the 401(k) plan has outpaced every other type of employer-sponsored plan. Now several new “options” for 401(k) plans are enhancing the existing benefits. Basic premise: In the typical 401(k) setup, an employer allows participating employees to contribute part of their salary to the 401(k) plan. Each employee determines the amount he or she will contribute to the plan, within certain limits. (The maximum dollar amount allowed for 2006 is $15,000.) Then the funds are invested on behalf of the employees. Because the money is set aside on a regular schedule (e.g., amounts are deducted from your paycheck), this is a relatively painless way to plan for retirement. Although an employer is not required to provide additional funds, it may choose to do so in a matching plan (e.g., contributing 50 cents for every dollar deferred). In any event, an employee may be able to set aside a sizeable amount for retirement. Of course, there are no guarantees as to investment earnings, but the contributions may accumulate on a tax-deferred basis over time. Furthermore, “catch-up contributions” are permitted for employees who are age 50 or older. For example, in 2006 you can add up to $5,000 more to the pot if you qualify. Key point: A 401(k) plan must benefit employees in general. It may be disqualified if highly compensated employees contribute a disproportionately higher amount than lower-paid employees. In general, withdrawals from the plan can be made when an employee separates from service or due to death or disability. Otherwise, withdrawals made before age 59½ are generally subject to a 10% tax penalty plus regular income tax. In the last few years, a few new features have increased the viability of 401(k) plans for employers and employees. This includes the following: “Solo” 401(k) plans for small businesses have increased as administrative costs have been reduced. An employer may institute an automatic enrollment program to ensure that the company meets certain participation requirements under the law. Safe-harbor plans have been designed to reduce the strict compliance burdens facing employers. These plans allow you to bypass complex testing procedures and permit highly compensated employees to maximize their contributions. A new Roth IRA (individual retirement account) feature may be added to an existing plan that enables 401(k) plan participants to make qualified distributions free of any income tax. This new feature—called the Roth 401(k) plan—first becomes available on January 1, 2006 (although the tax law provision authorizing this plan was enacted in 2001). In conclusion: Obviously, there are numerous options to choose from. Obtain advice for your company as well as your pl situation. [ return to list ]
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