What you need to know if you have one.
There are several types of contribution-based retirement plan programs, and the 401(k) is the most common type of defined-contribution retirement plan. If the term 401K makes your palms sweat and seems confusing, you’re not alone. Make the most of this – it is a fantastic benefit available to you.
Here are the top 10 questions – which will help clarify how a 401K works and how it benefits you.
1. Can I withdraw my money before I retire?
You can, but not without penalties. A 401K is designed to benefit you most AFTER you retire. Under certain circumstances you can withdraw, such as first-time home purchases or college expenses. You’re also able to withdraw money early for medical expenses in excess of 10% of your adjusted gross income. Or, if you become permanently disabled, you’re able to withdraw from your account without penalty.
2. What if I retire early (before age 59-1/2)?
Most folks are able to start taking withdrawals from their 401(k)s (or 403 (b) if you work for a nonprofit) without incurring a stiff penalty.
3. How much can I contribute to my 401(k)?
The “elective deferral limit” for 401(k) accounts is $18,000, with an additional $6,000 “catch-up contribution” allowed if you’re 50 or older.
4. How much should I contribute?
That all depends on your living expenses – how much income are you able to live without? At a minimum you should consider contributing enough to take advantage of your employer’s matching program. Contributing less than that is akin to giving away free money.
5. I’ve heard the term “vested.” What does that mean?
Vesting refers to the money that you “own” in your 401(k). You are always 100% vested in your elective contributions to a 401(k) plan, but your ownership of your employer’s contributions is typically governed by certain vesting rules.
6. Can I borrow money from my 401(k)?
You can borrow money from your 401(k) and pay yourself back (with interest) if your employer’s plan allows it. You are able to borrow up to half of your 401(k) balance or $50,000, whichever is less. You really want to avoid borrowing money because your account’s growth will be reduced and you can face sharp penalties if you don’t pay the loan back on time.
7. What are my options with an old employer’s 401(k)?
You have 3 choices – leave it where it is, roll it into an IRA account or roll it into your current employer’s plan. Don’t cash it out! No amount of temporary need is worth a long-term loss.
8. How should I invest my 401(k)?
That’s a really great question – some folks prefer to make their own elections while others let their account holder make percentage choices for them. Best thing to do is talk to an investment specialist.
9. Can I contribute to a 401(k) and an IRA?
You can contribute to a 401(k) and an IRA. Your income will determine whether you can take a tax deduction for traditional IRA contributions or contribute directly to a Roth IRA.
10. Do I get a tax break for my 401(k) contributions?
Yes! 401(k) contributions are excluded from your federally taxable income. If you need additional information on the breaks you can get, contact your tax professional.