401(k) Retirement Plans
With a basic understanding of the features of a 401(k) retirement plan and how they work, you’ll be much better prepared to make the most of this important benefit and to make progress toward your financial goals. The answers to these frequently asked questions can get you started.
Still having trouble?
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- While deferring any immediate income taxes on the money you save and its respective earnings until withdrawn or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, so pretax contributions help you lower your taxable income. 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. Because of these tax advantages, the IRS puts certain restrictions on withdrawing this money before you reach age 59½.
What are Roth contributions?
How much can I contribute per year?
Can I make catch-up contributions?
How are my contributions made?
When must my company invest my contributions?
What is a company match?
Can I change or stop my contributions?
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?
How does taking a loan affect the value of my account?
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 website. 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?
Can I contribute to an IRA and to my company 401(k) plan?
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.