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What are the differences and similarities between a 401K in the US and a regulated superannuation Fund in Aus?

  • I see many questions on here regarding 401K's which i assume are available in the United States. They sound quite similar to Regulated Complying Superannuation Funds in Australia. I have worked in the Superannuation industry in Australia so I understand in detail how Australian super funds work and the rules relating to them. I am specifically looking for information on how a 401K works and, if anybody knows about both superannuation funds and 401K's, what the similarities/differences are. If you only know about 401K's then please put down what you know and I will be able to work out the differences and similarities. My understanding is that 401K's are retirement savings accounts which are preserved until age 62 except in certain circumstances (much the same as a super fund). In the US does your employer make contributions into this account for you? Are the contributions compulsory? Is insurance available? The more info the better. Cheers

  • Answer:

    Since I spend time in both countries during each year, I can give your info, but from a layman's point of view. The 401 Ks are similar to super funds. The differences are that in the 401K 1) It is not compulsory for employers to contribute. It is also not compulsory for employees to contribute, although they have to realize that their retirement is their own responsibility. 2) Many employers only match the contribution that their employee puts aside, in many cases up to 6% to 10% of the employee's base income. 2) Insurance is only available at the employees expense and if the employee chooses to insure his/her income. 3) 401Ks are sort of like a form of savings. You contribute funds into your 401K account, sort of like dollar cost averaging. These funds are used to buy units of mutual funds based on how the employee selects his/her spread e.g if they select 60% growth funds and 10% cash funds etc, that is how the emploer distributes the funds into the 401K account. 4) 401Ks are investments in mutual funds, whereas in super you can make any form of investments via your SMSF 5) 401Ks are only taxed when you remove money out of the account; there are huge penalties for removing the funds if you are under age 65.

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401k is a defined contribution plan. The employer sponsors the plan and may or may not contribute to it. Employer also may or may not match any contributions the employee makes. Typically any contributions the employer does make (matching or based on compensation) has a vesting schedule attached so that the employee earns the right to those funds gradually only through employment service. If said employee fails to complete said service time the "unvested" portion goes to other participants either in the form of subsidizing a future contribuiton or an extra allocation. The employee can contribute their own funds if they choose...they do so on pre-tax income. Yet the amounts that they do contribute are counted when determining social security benefits. The contributions can be invested in almost whatever options the employer wants to allow....some limit choices others allow full brokerage accounts. There is no requirement on that end. Though it was in the past, insurance is not a big part of today's 401k's. The costs associated with it are better suited for taxable accounts. Money is taxed only when distributed. It's taxed as ordinary income which means at the same rate that typical wages are taxed. Prior to age 59 1/2 the money can be removed but will be subject to 10% extra tax unless certain criteria has been met. Most have to begin withdrawing at age 70 1/2 whether they want to or not. Benefits are 100% based upon contributions plus earnings. However, payment can taken lump sum, installments, or annuitized over life expectancy. In all cases it's based upon cash value at time of distribution (plus assumed future return of course). Not familiar with super funds but am in the 401k industry so I can work out comparisons with you if you'd like.

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