Why is it called a 401(k)?
A 401(k) is governed by the rules of Section 401(k) of the Internal Revenue Code – hence the term 401(k).
What does it mean to say contributions are tax-deferred?
Taxes are not due on contributions or any investment earnings until money is withdrawn.
What is the difference between traditional and ROTH?
A ROTH 401(k) is taken out of your paycheck after taxes, but grows tax free. Taxes are generally not paid when you withdraw funds. A traditional 401K contribution is taken out before taxes and grows tax free but you pay taxes when you withdraw funds.
When can I enroll?
Depending on your employer you may be able to enroll immediately or after a waiting period – generally 1 year.
How do I enroll?
Your employer will notify you when you are eligible to begin participating in your company retirement plan. You will have forms to fill out and they will generally invite the investment advisor for the plan to meet with you to help you with the process.
Can I increase/decrease the amount taken from my paycheck?
Yes! You can stop anytime due to financial difficulties. Depending on your employer, you may be able to increase or decrease the amount that you contribute from your paycheck, quarterly, monthly or each pay period. Check with your employer to see how much notice they need.
What is the minimum/maximum amount that I can contribute?
The IRS sets the limit each year for the amount that you can contribute to a 401(k) plan. For 2021, employees can contribute $19,500 per year or $375.00 per paycheck if paid weekly. If you are over age 50, you may contribute an additional “catch-up” amount. For 2021 the amount is $6,500. If you are over age 50 that means you can contribute $500.00 per paycheck if paid weekly. Other types of plans may have different limits.
What is an employer match?
A match is an additional contribution made by the employer that depends on how much the employee contributes. As part of an employee benefit package, and to encourage employees’ retirement saving, an employer may offer to match a certain amount of an employee’s 401(k) plan contribution.
Do all companies match 401K contributions?
An employer has complete discretion as to whether or not they match your contribution. The match can be a form of profit sharing. If your employer is not highly profitable, or if times are tough, they may elect to not match the contributions. The existence of a company match should not keep you from contributing to your 401k.
What does vesting mean?
Vesting refers to the rights of ownership of a 401(k) plan account balance. Contributions made by the employer on a worker’s behalf may be subject to a vesting period, which is the amount of time an employee has to work for an employer before earning the rights to the company’s contributions to his or her account. Vesting schedules vary from company to company, and often phase an employee in to full ownership rights over several years. Fully vested means the employee has earned the rights to all of the money an employer has contributed on his or her behalf to the 401(k) plan account.
What does safe harbor mean?
If an employer offers a 401(k) with a safe harbor match, that means the match contribution is fully vested when made. This allows the employer to not have to perform certain tests at the end of the year.
What is an Exchange Traded Fund?
An Exchange Traded Fund, also called an ETF, is a basket of securities whose holdings are based on a corresponding index (e.g. S&P 500). They are traded on the stock exchange like a stock. Different ETFs may contain only stocks, while others may track only bonds, commodities or other asset classes.
What does dollar cost averaging mean?
Dollar cost averaging is the practice of investing a fixed dollar amount on a regular basis. This allows for a consistent buying pattern during the ups and downs of the market.
Can I change my investments?
Yes! Although retirement plan funds are meant to be a long term investment. You should consider your risk tolerance, time horizon, goals and major life events before making any changes in your investments.
Can I roll money from a 401k at a former employer to a 401k at a new employer?
In most cases, yes. Contact your former employer and ask for the necessary form(s) to complete what is generally called a trustee-to-trustee transfer.
What happens if I change jobs?
Several options are available and they should be carefully considered. Depending on your balance, you may leave the money in the plan. Due to scale – or the total value of the plan – it may be more cost effective to remain invested in your plan. If your new employer offers a retirement plan, you may be able to roll your funds into the new plan. You may also roll your funds into a rollover IRA account.
What if I need to access the money in my account?
Some companies allow employees to take out loans. Although you pay yourself back, the interest you pay yourself may be less than a potential investment return. A hardship withdrawal may allow you to access money from your 401(k) plan. Plan policies vary, but usually employees cannot withdraw more than they have contributed. A worker must meet certain IRS requirements to qualify for a hardship withdrawal.
Is there a penalty if I need to access the money in my account?
Hardship withdrawals are taxable and may be subject to a 10 percent penalty if the employee is not at least 59½ years old.
What is a required minimum distribution?
A required minimum distribution (RMD) is the minimum amount a person must withdraw from a 401(k) plan once that person is retired and 72 years old.
What if something happens to me?
Your funds are generally immediately available if you become disabled. In the event of death, the funds in your account would pass on to your beneficiaries. An example of a beneficiary would be a spouse, children, parent, sibling or other family member or friend.
What does it mean to say a 401(k) plan can’t discriminate?
401(k) laws require that plans do not favor highly paid employees – they must be fair to ALL employees. The contribution percentage of highly paid employees may not exceed the contribution percentage of rank and file employees. Certain types of match payments to employees help ensure fairness.
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