Kristin Caldwell has just graduated from college and is considering job offers f

Question

Kristin Caldwell has just graduated from college and is considering job offers from two companies. Although the salary and insurance benefits are similar, the retirement programs are not. One firm offers a 401(k) plan that matches employee contributions with 25 cents for every dollar contributed by the employee, up to a $10,000 limit. The other firm has a contributory plan that allows employees to contribute up to 10 percent of their annual salary through payroll deduction and matches it dollar for dollar; this plan vests fully after five years. Because Kristin is unfamiliar with these plans, explain the features of each to her so she can make an informed decision.

Explanation / Answer

Ans: 401(k) plans are one of the type of defined contribution plan for retirements. In general, a 401(k) is a retirement account that your employer sets up for you. When you enroll, you decide to put a percentage of each paycheck into the account. These contributions are placed into investments that you’ve selected based on your retirement goals and risk tolerance. When you retire, the money you have in the account is available to support your living expenses.our 401(k) contributions are deducted right from your paycheck and go directly into your account before taxes are withheld. When you withdraw money from your account in retirement, it will be subjected to taxes. But since you’ll be retired, you’ll possibly be in a lower tax bracket.Take full advantage of the tax-deferral by contributing the maximum amount allowed by your company.401(k) plans are often offered in combination with other plans, such as profit-sharing plans.In addition to these employee elective deferrals, an employer can make supplemental contributions on behalf of employees. These employer contributions can be subject to a vesting schedule, but the employees' contributions must be nonforfeitable. Oppose this, Contributory plans may require the employee to enroll in the plan if he wishes to set aside a portion of his monthly salary. Some types of organizations, including those funded by tax revenues, may require full-time employees to participate in a contributory pension plan.Contributory pension plans withdraw a percentage of the employee's gross income on a monthly basis and deposits these amounts into an investment fund. The percentage the employee contributes may vary.Both contributory and noncontributory pension plans require the employee to accumulate a certain number of service years with the company.

Hence based on above, a firm which provides more benefits for your retirements should be applied for i.e. firm with 401(k) plan.

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