5/13/2011 12:05 PM ET|
5 things to know about your 401k
It pays to understand all the details of your company's plan, from employer matches to investment policies, so you maximize your savings.
How much do you know about your 401k? Probably not a lot. If you're like most people, you choose a contribution level and review your balance when the statement arrives. But that could be dangerous. If you don't understand the policies of your plan, you just might stumble into traps that could seriously devalue your retirement stash. Before you fall prey to a costly mistake, read on.
1. You might not be getting that employer match.
You might think your company match is making you rich. But you may be surprised to learn that with some companies, if you leave your firm before three years is up, you won't get a penny of it. You see, employers have some leeway as to when you can receive your match. Three- and five-year vesting periods are still enforced, although they're declining in popularity, according to benefits consultant Hewitt Associates.
2. If you take a loan and then leave the company, you'll have to pay the loan back -- pronto.
Sure, it's nice to know that you can always borrow from your 401k. But be warned: If you quit, are laid off or are fired, you're probably going to have to pay back that loan immediately. The risk is that you obligate yourself to paying back the loan at one of life's worst times.
What happens if you can't repay the loan? It will be treated as an early withdrawal. That means you'll owe taxes plus a 10% penalty. Bottom line? Think long and hard before borrowing. Your own 401k account could turn out to be the harshest collector you've ever encountered.
3. If your account is less than $5,000 when you leave the company, you could get cashed out.
If your account holds less than $5,000, be prepared to roll over your money when you leave your company. Otherwise, your company could cash you out. (If your account is more than $5,000, relax. Your former employer must let you keep your money where it is -- if that's what you really want to do.)
Now, being cashed out is not necessarily a big deal. But you'll save yourself a big headache if you tell your employer where you want your 401k assets to go when they're rolled over. That way, the employer can make out the check to your IRA trustee (your broker or mutual fund company) or your new employer's 401k plan.
Otherwise, your former company will make out the check to you. In that case, the firm will withhold 20% for taxes. You'll get that money back when you file your tax return the following year. But meanwhile, you've got to replace it; otherwise, you'll face income taxes and a 10% early-withdrawal penalty.
Being prepared will also help you meet the 60-day requirement for rolling over your 401k. What happens if you don't reinvest the money within 60 days? In most cases, your account will be treated as an early withdrawal, which means -- you guessed it -- taxes plus a 10% early-withdrawal penalty. (A few exceptions apply, including if the financial institution handling the distribution has made some sort of error, or if you are in the hospital.) And there's no going back. After 60 days that money is yours; you cannot reinvest it in a rollover IRA or a new 401k.
4. You may be charged a load to buy your mutual funds.
If you work for a small company, you may be paying sales charges to buy the mutual funds in your 401k plan. This is unacceptable. These fees often shave 4% off everything you invest. Or you could be paying 12b-1 fees that take as much as a percentage point out of your returns each year. Add to that some of the other fees that employers pass along to their employees -- such as investment-transaction fees and even record-keeping fees -- and suddenly that company match becomes less attractive.
What should you do if you are paying sales charges? Lobby your employer to switch to a no-load 401k provider like Fidelity Investments or Vanguard Group.
5. You may be stuck buying tax-advantaged investments in a tax-deferred plan.
Talk about a belt and suspenders. There are actually plenty of plans out there, especially 403b retirement plans for nonprofit organizations and schools, that offer tax-advantaged investments, like variable annuities. This is pointless. Your retirement plan is already tax-deferred. There is no sense in settling for the lower returns and higher costs of a variable annuity to get tax deferral there as well.
So what can you do? Ask your plan administrator if you can transfer (tax-free) part or all of your account into a 403b7 account. These accounts are invested directly in mutual funds, without the insurance wrapper. But you need to proceed with caution. First of all, make sure you do a trustee-to-trustee transfer (otherwise, you risk incurring the early-withdrawal penalty). And if your annuities are subject to surrender fees, for example, the most you will be able to transfer penalty-free from your account is just 10% annually.
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You cannot withdraw your 401(k) money until you actually stop working unless your plan allows in-service withdrawals. Age 59 1./ 2 is the age at which you can withdraw money from 401(k)'s, 403(b)'s, and IRA's without the 10% premature distribution penalty. But again, you cannot withdraw 401(k) or 403(b) money while you are still working unless your employer's plan specifically allows you to do so.
Item #1 refers to vesting. The more common vesting schedule is 6-year graded - not 3 year cliff. This means you'll get part of your money after 2 years of service but not all of it until 6 years of service. Vesting is meant to reward longer term workers over the here-today, gone- tomorrow workers.
Item #4 seems to be an ad for Fidelity and Vanguard. In reality, many fund families which normally have loads if you buy them privately, are no-load in 401(k) plans. ALL funds have asset management charges which is something that participants often overlook when choosing their investments.
Smart Money should be smarter in their research before they write advisory articles. I have been an independent third party administrator for all types of qualified retirement plans for many, many years and have to deal with the participants who don't understand why their plans don't work the way the internet or magazines say they should!
The most important thing to know about you 401k is that when you were told that having tax defered status on those fund it was a prelude to diligent representatives such as nancy pelosi suggesting that there should be an added tax to all of it, meaning essentially that it is too close to cheating the system for you to actually make a profit by investing.............just like keeping thier hands off of our social security.
Since regan and then clinton robbed the s/s funds to show thier crafty abilites at "balancing the budget" by literally stealing 100 billion each and then combining the s/s funds into the general fund is enough proof to say that our representative believe that we have little right to any kind of retirement!
Our representatives believe that our retirement funds are there for them to hand out to not just the helpless but also to the clueless in an effort to buy themselves more votes!
What if you are between 55 and 62, and you have absolutely nothing for your savings. What you need is a kung fu, kick ****, Industrial, last chance plan.
If you're 55 the first thing you have to do is improve your credit rating. Then invest small money in the stock market. Win or lose, learn how to play the stock market.
When you're 59 1/2, 401(k) considers you retired. If you want, you can withdraw your money and invest it how you think it should be.
At 62, if you're making under $40,000. You could take out your Social Security early. Put all of your income in your 401(k), over 14,700. What this means is that your income is deferred to your 401(k). The early Social Security would make up what to lose putting into your 401(k). The amount you put into your 401(k) would be anywhere from 40 to 55%. But your take-home pay would be the same, as when you were 61. Your nest egg at 66, should be in the range of $40-$70,000.
Since the you are the working poor, like me. With that kind of nest egg, you should be able to cut to part-time, or start a small business.
I'm not saying that you can retire scot-free at 66. But you should be in better shape.
This offer is only good, if you've had huge medical bills, rotten in-laws, children who need help, and an over abundance of grand children.
Warning! No retirement advisors will tell you this. This is from the street, and I, am a professional janitor at Wal-Mart's. So you know it's the truth.
Unbelievably between 62 and 66 you can pull your money out of your 401(k), once a year and still not pay a penalty on your Social Security. Make sure you give Social Security your 401(k) adjusted income..
Max Contributions for 401k in 2011: $16,500.
Max Roth IRA: ages 49 and below: 5,000. 50+: 5,000
don't forget, you can put whatever you want in a brokerage account. No max outs..
Should I be worried??????? I retired from a state school system in 2007 and presently earn a gross retirement gross income of $81,000 .. this is $20,000 less than what I made in 2007 before state tax of 4%, 10% of gross to retirement system and 3 1/2 local income tax where deducted.
I'm presently 59 years old and working in another state mainly to:
1] work 5 years and have a small social security income at 62 [ did not pay into the SS for 32 years in first school system]
2] work 5 years and have a very small monthly income at age 60 [ about $300 per month]
3] work on placing $60,000 in a 401k by the age of 62
4] I have only $25,000 in savings and a house valued at $425,000 and mortgage of $135,000
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