Alan S. Moore / L’Observateur / June 21, 2000

An employer-sponsored 401(k) plan allows an eligible participant to contribute pre-tax dollars to a tax-qualified retirement plan. It may notbe the same thing as the pension your parents or grandparents may have had, but it has the same goal: to help you pursue financial security for your retirement.

There are several basic features of a 401(k) plan: You are permitted to defer some percentage of your pre-tax compensation up to a maximum of $10,500 (for Year 2000) into the plan.

The maximum percentage permitted is determined (within certain limits) by your employer and is commonly no more than 15 percent.

Dollars contributed to the plan are not subject to federal and generally not to state income taxes (certain states excepted) until you receive a distribution from the plan. Any investment gains and earnings also enjoytax deferral until distribution.

You may generally receive distributions from the plan when you terminate employment, retire or in the events of death or permanent disability as well as in any other situations permitted by your employer’s specific plan.

The sooner you start investing for retirement through a 401(k) plan, the better your chances are for growing your nest egg. Not only will you havemore time to contribute a portion of your salary, but you’ll also have more time for those contributions and earnings to potentially build on themselves and earn even more money, or “compound.”Numerous advantages exist along with the tax savings that accompany participation in a 401(k). For example, in addition to your own salarydeferral contributions into your 401(k) account, your company may offer a matching contribution of a portion or all of your personal contributions.

Imagine receiving money towards your retirement, simply because you chose to participate in the plan! Both employee and employer-contributed dollars are invested in your account and accumulate tax-deferred, until they are withdrawn, usually at retirement.

While a 401(k) plan is designed to allow assets to accumulate tax- deferred for use in one’s retirement years, there are certain instances in which a 401(k) plan may offer financial assistance when other sources are unavailable. Some plans allow for loans, through which participants mayborrow money from their own accounts and repay themselves accordingly.

Other plans may offer distribution options such as hardship and in-service withdrawals. It is important to keep in mind that any withdrawals from a401(k) account (excluding loans, unless they are not repaid), are taxable as ordinary income and may be subject to a 10% early withdrawal penalty if the participant is under age 59 1/2. Consult your plan administrator forspecific details concerning your particular plan and the options available.

If you are highly compensated or own a portion of the company, your ability to participate in a 401(k) plan may be limited by the participation of other employees. Any person whose compensation exceeds $85,000and/or is more than a 5 percent owner of a company is considered to be a “Highly Compensated Employee.” IRS rules are designed to protect thosewho earn less from being discriminated against in employer-sponsored retirement plans. Thus, certain tests are required of all plan sponsors toensure the fairness of each 401(k) plan. These tests may result in lowersalary deferral options for Highly Compensated Employees in order to prevent contribution gaps between employees. Be sure to contact your taxadvisor regarding your specific circumstances.

Whatever your status within your company, if a 401(k) is offered, you should consider participating to the best of your ability. If you don’t planfor your own future then you may not achieve the future that you envision.

ALAN S. MOORE, who writes this column every Wednesday forL’Observateur, is a financial advisor with Legg Mason Wood Walker, Inc., asecurities brokerage and financial services firm and member of the New York Stock Exchange, Inc. and SIPC.

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