401(k) Retirement Plans
Frequently Asked Questions
What is a 401(k) retirement plan?
A 401(k) is an employer-sponsored qualified retirement savings plan. It allows you to save for your retirement:
- While deferring any immediate income taxes on the money you save or its respective earnings until withdrawn or
- While paying current income tax on the money you save but no income tax on the earnings upon distribution.
Who can establish a 401(k) plan?
A 401(k) plan may be established by a sole proprietor, partnership, corporation, and by certain non-profit organizations. Currently, state and local governments are prohibited from adopting a 401(k) plan.
How does a 401(k) plan work?
The participant decides, based upon applicable plan provisions, how much money he or she wants deducted from their paycheck and invested during each pay period, up to the legal maximum established annually by the Internal Revenue Service (IRS). With a participant directed account you decide how to invest that money, choosing from your plan’s different investment options. The money you contribute to your 401(k) account is deducted from your pay either before income taxes are taken out (pretax contributions) or after income taxes are taken out (Roth contributions).
What are pretax contributions?
Pretax contributions are the amounts invested into your company retirement plan that are deducted from your paycheck before income taxes are calculated. By contributing to a 401(k), you can actually reduce the amount you pay in taxes each pay period. Pretax contributions help you lower your taxable income. Because of these tax advantages, the IRS puts certain restrictions on withdrawing this money before you reach age 59½. For example, if you earn $1,000 each paycheck, and you contribute 5% ($50), you are only taxed on $950. You don’t owe income taxes on the money until you withdraw it from the plan.
What are Roth contributions?
Roth contributions are the amounts invested into your company retirement plan that are deducted from your paycheck after income taxes are calculated. Roth contributions and their earnings can be distributed tax-free if you have a Qualified Roth Distribution (you have had your money in the Roth account for 5 years and you have reached age 59½, died, or become disabled).
How much can I contribute per year?
Under current tax law, you may contribute $22,500. Any previous contributions and your participation in other retirement plans may also affect your contribution limit. Of course, you must satisfy the plan’s eligibility requirements before you can defer. Certain non-discrimination rules may further limit deferral in some circumstances.
Can I make catch-up contributions?
Current IRS guidelines allow an individual who will attain age 50 within the calendar year to make an additional pretax catch-up contribution if allowed by your plan provisions. The additional catch-up amount is $7,500.
How are my contributions made?
Once you have met your plan’s age and service requirements, your contributions are automatically deducted from your paycheck. Simply submit an enrollment form indicating a deferral percentage to your employer and your contributions will be deducted and added directly to your 401(k) retirement plan. Your plan may limit when deferrals may begin or how often they can be adjusted.
When must my company invest my contributions?
Department of Labor regulations require plan sponsors to submit employee contributions into the plan in a “timely manner” after they are deducted from the employee’s pay. The regulations provide that participant contributions to retirement plans become plan assets and must be deposited on the earliest day they can reasonably be segregated from the employer’s general assets. For small (less than 100 employees) employers, this is deemed to be seven days after payroll withholding. Failure to submit contributions in a timely manner may result in fines and other penalties.
What is a company match?
Some companies offer a “match” or “matching contribution” as an incentive to participate in their retirement plan. It means that the company will contribute a certain amount to your account (usually between 25%–100%) for every percent that you contribute, up to a certain limit. The match formula can vary. To receive the matching contribution, the plan may require that you meet eligibility requirements. It makes good sense to take advantage of a company match by setting aside the maximum amount required to qualify for a matching contribution. If your employer offers a matching contribution, your savings can grow that much faster.
Can I change or stop my contributions?
Yes. You can change the amount of your contributions as often as your plan permits. You can also stop your contributions at any time and start again on a date determined by the plan.
Can I access my money in an emergency?
Depending on your plan, you may be eligible for a “hardship withdrawal.” According to IRS regulations, your hardship must represent an “immediate and heavy financial need” and there must not be “any other resource reasonably available to you to handle that financial need” (e.g., insurance, liquidation of assets, etc). The IRS recognizes six reasons for a hardship withdrawal:
- Certain unreimbursable medical expenses
- Purchase of a primary residence
- Payments of post-secondary tuition for the next year
- To prevent eviction from or foreclosure on your home
- Payments needed to repair damage to your principal residence that would qualify as a deductible casualty expense
- Payment of funeral expenses for your deceased parent, spouse, children or dependents.
Can I borrow money from my 401(k) retirement plan?
Loans may be available subject to IRS restrictions and plan rules. Check with your Human Resources department or plan administrator for details.
How does taking a loan affect the value of my account?
Your account will be reduced by the amount of the loan. Over time you may miss out on the potential earnings that may have occurred as a result of a loss of your principal in your account. Even though you repay a loan to your account and continue to make contributions, you still lose the earnings potential for the amount of the loan while you are repaying it.
How will I know the value of my 401(k) retirement plan?
You will receive quarterly statements detailing your plan activity. You can also access your account information on our Web site. Online access allows you to monitor and make certain changes to your account, provides quick access to historical investment performance for your plan, and summarizes your plan provisions.
Will my Social Security benefits be affected by my 401(k) plan distributions?
Not necessarily. Having a 401(k) will not reduce your Social Security benefits, but distributions from your 401(k) taken during retirement may make your Social Security benefits subject to federal income tax, especially if you have other significant income.
Can I contribute to an IRA and to my company 401(k) plan?
Yes, you may contribute to an IRA and your company 401(k) plan, however the IRA deduction may be limited. Contact your tax advisor for more specific information.
What happens to my 401(k) plan money if I leave my current employer?
Generally, if you change jobs, you have four options available:
- Transfer your money directly into an Individual Retirement Account (IRA)
- Transfer your money into your new plan, if allowed by your new employer
- You may be able to leave money in your current 401(k) plan if you have more than $5,000 invested in your account
- You can take a full or partial withdrawal with the check payable to you and receive the funds directly, depending on the terms of your plan. You will owe income taxes on the withdrawal and you may also owe an additional 10% IRS early withdrawal penalty if the funds are withdrawn before you turn age 59½ (or age 55 if you have separated from service). In addition, other penalties may apply
All options are subject to your specific plan rules. You should work with your financial professional and tax advisor to determine the option which best suits your situation.
When do I have to start taking money from my 401(k) plan?
You must begin to take distributions no later than April 1 of the year following either the year in which you turn age 73 or the year in which you retire, whichever is later. If you are a 5% owner, you must begin to take distributions no later than April 1 of the calendar year following the calendar year in which you attain age 73.
What happens to my 401(k) retirement plan if I die?
Your designated beneficiary will receive the value of your retirement plan. This death benefit may be subject to income taxes.
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