The Nontechnical Audience Speech #3 Advanced Communications Manual – Technical Presentations Karen A. Threlkeld, PMP, CC, CL Toastmasters Power Speakers Club

The ABCs of 401(k)s

What is a 401(k)? A type of employer-sponsored retirement plan in the United States, named after a section of the U.S. Internal Revenue Code. It allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal . From A Guide to the Project Management Body of Knowledge (PMBOK ® Guide) – 2000 Edition

A type of employer-sponsored retirement plan in the United States, named after a section of the U.S. Internal Revenue Code.

It allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal .

How does it work? The employee elects to have a portion of his or her wages paid directly, or "deferred", into his or her 401(k) account. This money is taken out “before-taxes” and thus reduces your taxable income. Income taxes are not payable until the money is withdrawn. For example, if you earn $1,000 each paycheck, and you contribute, say 5% ($50), you are only taxed on $950. You don't owe income taxes on the money until you withdraw it from the plan, when you could be in a lower tax bracket. Many companies match all or some of the employee’s contributions. From A Guide to the Project Management Body of Knowledge (PMBOK ® Guide) – 2000 Edition

The employee elects to have a portion of his or her wages paid directly, or "deferred", into his or her 401(k) account.

This money is taken out “before-taxes” and thus reduces your taxable income.

Income taxes are not payable until the money is withdrawn.

For example, if you earn $1,000 each paycheck, and you contribute, say 5% ($50), you are only taxed on $950. You don't owe income taxes on the money until you withdraw it from the plan, when you could be in a lower tax bracket.

Many companies match all or some of the employee’s contributions.

What happens to the money? The employee determines how the money is invested! Several options are usually available: Money market Stocks Mutual funds The employer match is sometimes made in company stock.

The employee determines how the money is invested!

Several options are usually available:

Money market

Stocks

Mutual funds

The employer match is sometimes made in company stock.

What happens to the money? (2) The account grows as the investments grow in value and pay dividends AND as you continue to defer a percentage of your wages from each paycheck

The account grows as the investments grow in value and pay dividends AND as you continue to defer a percentage of your wages from each paycheck

401(k) Rules Money cannot be withdrawn without a penalty before age 59 1/2 Money must be withdrawn beginning April 1st of the calendar year after the attainment of age 70½ or penalties will apply

Money cannot be withdrawn without a penalty before age 59 1/2

Money must be withdrawn beginning April 1st of the calendar year after the attainment of age 70½ or penalties will apply

What if I need the money NOW?! Hardship Withdrawal Loan

Hardship Withdrawal

Loan

Hardship Withdrawal Financial hardship withdrawal 10% penalty applies if you withdraw before 59 ½ The withdrawal is also taxed as income Examples: To buy a primary residence or to prevent foreclosure or eviction from your home; to pay college tuition for yourself or a dependent; to pay unreimbursed medical expenses for you or your dependents Penalty-free withdrawal 10% penalty is waived but you still pay taxes Examples: You become totally disabled; you are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income; you are required by court order to give the money to your divorced spouse, a child, or a dependent.

Financial hardship withdrawal

10% penalty applies if you withdraw before 59 ½

The withdrawal is also taxed as income

Examples: To buy a primary residence or to prevent foreclosure or eviction from your home; to pay college tuition for yourself or a dependent; to pay unreimbursed medical expenses for you or your dependents

Penalty-free withdrawal

10% penalty is waived but you still pay taxes

Examples: You become totally disabled; you are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income; you are required by court order to give the money to your divorced spouse, a child, or a dependent.

Loan A loan from your 401(k) allows you to borrow against your savings. The loan must be paid back, usually within five years, and payments are withdrawn from your paycheck in addition to your “regular” 401(k) contributions. Can cause problems if you leave your job before the loan is paid back!

A loan from your 401(k) allows you to borrow against your savings.

The loan must be paid back, usually within five years, and payments are withdrawn from your paycheck in addition to your “regular” 401(k) contributions.

Can cause problems if you leave your job before the loan is paid back!

A Word of Advice Consult with a professional before withdrawing money from a 401(k) There are serious penalties and tax implications to consider!

Consult with a professional before withdrawing money from a 401(k)

There are serious penalties and tax implications to consider!

What if I change jobs? Generally, you can leave the money where it is and let it continue growing. You just wouldn’t be making the deferred contributions from your paycheck You can “roll it” into a self-directed IRA account.

Generally, you can leave the money where it is and let it continue growing.

You just wouldn’t be making the deferred contributions from your paycheck

You can “roll it” into a self-directed IRA account.

What is a “Self-directed IRA”? IRA = Individual Retirement Account A “self-directed IRA” is one where you, the investor, make all the decisions about the account IRAs are a lot like 401(k)s except they are not coordinated through your employer There are LOTS of 401(k) providers who can provide more information Fidelity Charles Schwab Merrill Lynch TD Ameritrade ScottTrade

IRA = Individual Retirement Account

A “self-directed IRA” is one where you, the investor, make all the decisions about the account

IRAs are a lot like 401(k)s except they are not coordinated through your employer

There are LOTS of 401(k) providers who can provide more information

Fidelity

Charles Schwab

Merrill Lynch

TD Ameritrade

ScottTrade

What does Southern Company offer? The Employee Savings Plan (ESP) is Southern Company's 401(k) plan. Eligible employees can contribute from 1% to 25% of base pay on a before-tax or after-tax basis or a combination of both, up to certain annual federal limits. The company currently matches 85% of the first 6% of base salary that participating employees contribute. All contributions, including company-matching contributions, are invested in the investment option(s) you select.

The Employee Savings Plan (ESP) is Southern Company's 401(k) plan.

Eligible employees can contribute from 1% to 25% of base pay on a before-tax or after-tax basis or a combination of both, up to certain annual federal limits.

The company currently matches 85% of the first 6% of base salary that participating employees contribute.

All contributions, including company-matching contributions, are invested in the investment option(s) you select.

Scenario You make $1000 per pay period and contribute 5% to the ESP ($50) Your taxable income is only $950 Southern Company adds another $42.50 to your contribution, for a total of $92.50 You make $2000 per pay period and contribute 10% to the ESP ($200) Your taxable income is only $1800 Southern Company adds $102 (85% of $120 or 6%), for a total of $302.

You make $1000 per pay period and contribute 5% to the ESP ($50)

Your taxable income is only $950

Southern Company adds another $42.50 to your contribution, for a total of $92.50

You make $2000 per pay period and contribute 10% to the ESP ($200)

Your taxable income is only $1800

Southern Company adds $102 (85% of $120 or 6%), for a total of $302.

Benefits More secure retirement Reduces your taxable income now Taxes on withdrawals is based on your income at the time of the withdrawal You determine how the money is invested FREE MONEY, in the form of the employer match

More secure retirement

Reduces your taxable income now

Taxes on withdrawals is based on your income at the time of the withdrawal

You determine how the money is invested

FREE MONEY, in the form of the employer match

Last Words If your employer offers a 401(k) plan with an employer match, you are CRAZY if you don’t contribute at least the amount required to get the maximum employer match So, at Southern Company, you should contribute at least 6% before-tax Google “401(k)” or go to the library to get more information

If your employer offers a 401(k) plan with an employer match, you are CRAZY if you don’t contribute at least the amount required to get the maximum employer match

So, at Southern Company, you should contribute at least 6% before-tax

Google “401(k)” or go to the library to get more information