Top 401(k) Questions

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10 Common 401k Questions

401(k) plans are the most common defined contribution retirement plans in the U.S. The problem is, not every worker fully understands how they work. To aid in clarifying how they work and how they can serve as a powerful retirement savings tool, here are a few commonly asked questions and answers.
1. Is it possible to spend some of my 401(k) before retirement?
Using funds from your 401(k) isn’t cut and dry. There are variables. Common exemptions to early-withdrawal penalties including first-time home buying and college expenses, apply strictly to IRAs not 401(k)s. Some cases where it is possible to withdraw funds from your 401(k) include withdrawing money for medical bills that go beyond 10% of your adjusted gross income. Individuals with permanent disabilities may also withdraw from the account with no penalties.
2. What happens if I retire early?
If you decide to retire before 59 1/2, you can withdraw funds from your 401(k) without penalties under certain circumstances. These include if the “separation from service” rule allows you to stop working for your employer after you turn 55 and receive your funds. Regardless if you’re fired, laid off or retire. You may be able to tap into the IRS’ substantially equal periodic payment known as (SEPP), wherein you agree to withdraw funds based on your life expectancy as calculated by the IRS.
3. What is the maximum amount I can contribute to my 401(k)?
In regards to the 2017 tax year, the IRS’ elective deferral limit for 401(k)s is $18,000, with each payment of $6,000 beyond that only being accepted by individuals 50 years and older. This amount doesn’t include employer contributions, automatic contributions, or other types of 401(k) contributions. The maximum amount for all source contributions is $54,000 for individuals under 50 and $60,000 for those over age 50
4. What is a good amount to contribute to my 401(k)?
There is no hard and fast rule to how much you should contribute. However, at the very least you want to contribute enough to take advantage of your employer’s matching program. Putting in less than that is like throwing away free money. Calculate how much you’ll earn by retirement and if it isn’t enough, start contributing more.
5. What does “vested” mean?
Vesting means that you own the money you put into your 401(k). While you 100% own your elective contributions, your employer’s contributions could be supervised by certain rules. Check with your employer to see what rules may be governing your contributions.
6. Is it possible to borrow from my 401(k)?
In cases where your employer allows you to borrow money from your 401(k) you may certainly do so, but you will likely have to pay yourself back with interest. You may borrow up to half of your balance or $50,000 whichever is less. However, it is generally recommended to avoid borrowing from your 401(k) because of compound growth and hefty penalties.
7. What about my 401(k) through my previous employer?
There are multiple options for your old 401(k) account. You may choose to leave it as is, only if it has a minimum threshold of $5,000. Another option is to roll it into an IRA. Finally, you may have the option to put it into your current employer plan. Cashing out is another option, but it’s generally recommended against.
8. What is the best way to invest my 401(k)?
While there is no clear way to tell you how to invest in your 401(k)s, you should be able to set up a primer on asset allocation. This allows you to dictate how much money should be in cash, bonds and stocks. Research what type of investments are available through your plan to learn more.
9. Is it possible to contribute to both an IRA and a 401(k)?
Yes, you can contribute to both. However, your income will dictate if you can take a tax deduction for traditional IRA contributions or if it’s possible to contribute to a Roth IRA at all. If your adjusted gross income is less than $62,000, and you’re single, you can deduct all of your IRA contributions.
10. Can I get a tax reduction for my 401(k) contributions?
Absolutely! 401(k) contributions are excluded from federally taxable income. They don’t come off your Social Security or Medicare taxes, but nonetheless this is still an excellent deduction. Additionally, you don’t have to itemize deductions to enjoy the perks. Your W-2 will show your 401(k) contributions automatically.
Have more questions that aren’t answered here? Then please contact our team. We’re happy to help you make the best retirement decisions.

Frequently Asked Questions

Can I use some of my 401(k) funds before retirement for first-time home buying or college expenses?

No, exemptions like first-time home buying and college expenses apply strictly to IRAs, not 401(k)s. However, exceptions like medical bills exceeding 10% of your adjusted gross income allow for early withdrawal from 401(k) without penalties.

If I retire before age of 59 1/2, can I access my 401(k) funds without penalties?

Yes, if you retire before 59 1/2 and meet certain conditions. For instance, the “separation from service” rule permits you to leave your employer after age 55 and access your funds, whether you retire, are laid off, or get fired. Alternatively, you can use the IRS’ SEPP method based on your life expectancy.

What does it mean if my 401(k) contributions are “vested”?

Vested” means you own the money you’ve contributed to your 401(k). You always own 100% of your elective contributions, but employer contributions may have certain rules. It’s best to check with your employer for specifics.

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