One of the most commonly used retirement tools is a 401(k) plan. Despite how frequently these plans are used by American workers, the average person knows very little about how they actually work. True, the rules and regulations relating to 401(k) plans are hidden in the fine print when you open the account; however, if we are all honest, most of us never read the fine print. Instead, we depend on what a parent, trusted advisor, or even the person working in human resources to tell us what we need to know about our retirement planning options. If you currently have a 401(k), or you are contemplating opening one, you may wish to read through the following common 401(k) questions and answers.
- What is a 401(k)? Once upon a time, workers could count on lifetime employment and a pension when they reached retirement age. By the 1970s, the concept of lifetime employment began to disappear, along with the pensions. Instead, employers began to offer employees the option to open a 401(k), so named because of the IRS Code section that governs them. A 401(k) is an employer sponsored retirement account that lets an employee contribute pre-tax dollars. The employee’s contribution is typically matched by the employer. The money is only taxed when it is withdrawn. Unlike pensions which were managed by the employer, the employee decides how a 401(k) account is invested.
- What does “vested” mean? “Vested” refers to the amount of money you can take with you if you leave the company. You are always entitled to take your own contributions with you when you leave; however, you may not be entitled to take your employers portion of the fund until you reach the point at which you are “vested.” The time required to become vested it set by your employer. Some companies increase the amount you are entitled to each year until you are fully vested.
- What kind of investments can I make with my 401(k)? Most 401(k) plans offer a spread of mutual funds composed of stocks, bonds, and money market investments. They also tend to become more conservative as you get closer to your retirement date.
- Can I withdraw money before I retire? For the most part, not without a stiff penalty. There are a few exceptions though. Medical expenses that exceed 10 percent of adjusted gross income, for example, can qualify for early withdrawal. Because the rules are subject to change, always check with your financial advisor before withdrawing from your 401(k).
- What happens if I leave my job for any reason? If you terminate your employment for any reason, you can roll your 401(k) over into an Individual Retirement Account (IRA). Some employers will even do this for you. If the funds accrued are minimal, your employer may simply send you a check.
- Is there a limit to how much I can contribute? Yes. The limit is subject to change but for 2017 it is $18,000. You can contribute an additional $6,000 if you are over age 50 pursuant to the “catch up” rules. There are also limits for the total contributions per year from all sources. For 2017, the total contributions from all sources cannot exceed $54,000 if you are under age 50 and $60,000 if you are over age 50.
- Can I borrow from my 401(k)? Yes, you may be able to borrow from your account; however, it is usually not a good idea to do so unless absolutely necessary. The account’s growth slows down while the funds are gone and you may pay a hefty interest rate and/or fees for borrowing the money.
- How can I learn more about my 401(k) options? Start by asking for all the information your employer has on the plans they offer – and then actually read through the information. You should also consult with both your financial advisor and your estate planning attorney to ensure that your retirement planning decisions do not conflict with your overall estate plan.
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns regarding your 401(k) options, or retirement planning in general, contact the experienced Florida estate planning attorneys at Kulas & Crawford by calling (772) 398-0720 to schedule an appointment.