The Moola Masters Blog

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Financial Planning for Retirement: 401k!

retirement Aug 05, 2022

Hi All!

Heidi here and we are going to be answering questions!

Our first question was "What is the history of the 401K?

Here we go!

In 1978 congress passed the 1978 Tax Revenue Act and part of it said that people do not have to pay taxes on deferred compensation. They only pay taxes when they get the money! They passed this law because some people got stock options from their company instead of cash. Congress didn't think people should have to pay taxes until they cashed out their stock options and they actually had money!

In 1980, this guy named Ted Benna was looking for a tax advantaged retirement package for a client and he stumbled on line 401K in the IRS Tax Codes. He thought it would be a neat way to create a retirement package and the 401K was born!

In 1981 the IRS got excited about the accidental retirement plan too. The IRS said that people can put pre tax dollars into their 401K with a payroll deduction and companies can contribute to the retirement account if they want.

The 401K took off in the 1980's with most of corporate America transitioning to a 401K plan instead of pensions. The reason corporate America went nuts about it was that pension plans were a huge liability and cash flow issue for them. Just think about it, after someone worked for them a certain number of years they were promising a monthly check until that retiree passed away. They had to have a HUGE cash reserve to support this and invest it well!

Corporate America looked at the 401K plan and realized:

- The Employee had to actually sign up for it. (Some states require an automatic enrollment in the 401K plan and employees have to actually Opt Out if they don't want the retirement plan.)

- The Employee decided how much money to put in to it.

- The Employee had to decide how to invest it.

- The employer didn't have to put any money into the retirement plan unless they wanted too!

Wow! Now the Employees were responsible for their own retirement! All corporate America had to do was hire a company to run the 401K for them.

What does this mean for you?

Your retirement is completely up to you. You will get a social security check from the government (hopefully) but we all know this isn't enough money to live on.

You need to know how much money you are putting aside for retirement, how it is invested and, if you change jobs, make sure you know where your money is! 

 

 

Our next Blog is going to be about 401K rules.

See you next week!

 

 

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