401(k) Questions and Answers
It seems simple to open up a 401(k), you fill out the forms and send them into your human resources office, soon you will see the deductions show up on your pay stub, and then you begin receiving account balances in the mail annually. But what if you additional questions about your 401(k), here is a list of the seven common questions asked about 401(k)s.
What does vested even mean? Companies want to increase your longevity, and they do this by setting a guideline for how long it takes for you to be vested in their contributions to your retirement plan. The vested amount is the amount that you take with you if you were to leave your job. You do get to take all of your contributions, but you may not be able to take all of your employer’s contributions until you are vested.
When it is time to change jobs, and you are moving on to better and bigger things, don’t leave behind your 401(k). It is not difficult to roll your 401(k) over into a traditional IRA, and it will benefit you financially in the future. If you have less than $5000.00 in your 401(k), your former employer may decide to remove you from the plan. They will send you a check if the amount is $1000.00 or less. If it is $1000.01-$5000.00, then they will roll it over into an IRA for you.
It is important to take advantage of any match that your employer offers you. It is free money that will help your retirement account to grow, but once you reached that match amount should you consider other retirement options? You may want to diversify slightly by opening up and contributing to an IRA. It may be an option if you max out your allowable contributions to a 401(k).
If your employer gives you the opportunity to choose between a traditional or a Roth 401(k), you may be unsure about what one to choose. A Roth 401(k) is taken out after taxes, but grows tax-free, while a traditional is taken out before taxes, but you are taxed on your earnings.
It is always good to understand the funds in which your money is invested. You should at least understand the basic types of mutual funds and the risks associated with them. It will help you to make choices that you are comfortable with when you choose where to invest your money. If you have questions, you can ask your human resources representative to give you a basic explanation. Be sure to review your 401(k) statements regularly to understand how your investments are doing.
A 401(k) loan allows you to borrow money from your 401(k). However, you must pay it back in five years, and there are limits on what you can borrow. If you were to get your job or get laid off, the balance is due in full, or you will be expected to pay the taxes and penalties as though you had taken a disbursement. It should be a last resort for your situation.
You should begin aging for retirement, even if you do not currently qualify for a 401(k) right away. The simplest solution is to contribute to an IRA, but there are also options available if you are self-employed. You can make monthly contributions to an IRA and open it with an investment house without a large initial investment amount. Be sure to make saving for retirement a priority since your Social Security payments are unlikely to let you retire comfortably.
When you switch jobs, you may have the option of leaving your 401(k) account with your old employer, or you may be required to move it to another account. It may be based on your employer's policy or the amount that is currently in your 401(k). If you are required to move it, then you should roll it into an IRA. It is best if you roll it into the same type of IRA, like a 401(k) account that you have, either a traditional or a Roth, so that you do not have to worry about paying taxes or changing the tax situation on the money. Remember that you will lose any of your employer's contributions if you are not yet fully vested in your 401(k).