A 401(k) plan is type of retirement plan sponsored by your employer and named for a particular section in the United States Internal Revenue Code. With a 401(k) plan you can save money for retirement and avoid paying taxes on that deferred income until you withdraw those funds from your 401(k) account at a later date. Did you know that in 2005, 47 million people participated in a 401(k) plan in the US? Pretty staggering numbers considering only 25% of eligible participants actually participated and less than 10% of participants saved the maximum allowed, with the average being a 6% contribution of salary and employer match of 3%. Here is a list of common questions and answers about 401(k) plans:

1. What is a good pre-tax percentage to invest if I decide to contribute to my 401(k)?
This is a difficult question to answer and depends on your current financial situation, spending patterns and how reliant you plan to be on your 401(k) for retirement, but a good rule of thumb is, 'The sooner you start saving?-the better'! If you do plan to invest in your 401(k) you should consider maximizing your company's match. As an example, if your company matches dollar-for-dollar up to 5% of your gross salary, you should contribute at least 5%. If your company is willing to contribute to your 401(k) plan, make the most of it!

2. Just how much can I contribute to my personal 401(k) account?
The maximum amount of your pre-tax dollars you allowed to contribute is set by the US Government and adjusted for inflation annually. For example: the 2006 pre-tax contribution limit you can put in your 401(k) is $15,000.

If you are age 50 years or older you may also make an additional 'catch-up' contribution of a maximum of $5,000 per year. Keep in mind that some plans may offer you the option to contribute on an 'after-tax' basis and in this case, the $15,000 limit does not apply. You should also know that some 401(k) plans may restrict your yearly contribution to an amount less than $15,000, and may also elect not to permit you to make 'catch-up' contributions.

3. What if I want to take money out of my 401(k) while I am still employed?
Ideally, you should budget a large enough percentage of your pre-tax income so that you don't have to withdraw money from your 401(k) account, but if you do have to, there will be some penalties. Generally, certain plans offer personal loans allowing you to borrow funds in your 401(k) account, but keep in mind you have to pay yourself back, with interest. The bad news is: if you fail to pay back the loan as agreed, the amount you took out will be treated as a 'withdrawal' and the remaining loan balance will be subject to income tax as well as a 10% 'early withdraw penalty'.

4. What happens to the money I contributed to my 401(k) if I leave the company or am terminated?
The good news is: your options are the same whether you leave or are terminated. If your 401(k) account balance is more than $5,000, you can simply leave your money in the plan and continue on. If you want to take your money with you to the next company or another plan, the money you contributed can be 'rolled' into another 401(k) plan with your employer or put into an IRA to avoid early withdrawal penalties.

Getting your head around various 401(k) options can be difficult at best, www.retireology.com is here to help answer some of the important questions and give you relevant info about 401(k) plans!