Frequently Asked Questions on Your 401k Plans
Written by James Chan   


1. What should I know about a 401k plan?
It’s an employer-sponsored retirement plan. A portion of your monthly paycheck will be deducted to be contributed to a 401k account, and will be invested at the employee’s discretion (most of the time) and accumulate gains without capital gains taxes. Once you reach a certain age- currently 59½- you are allowed to withdraw from your 401k plan as part of your taxable income. Every 401k operates under slightly different terms. Some companies may have Employer Matching Contribution Programs, and others may offer tax free withdrawals in exchange for after-tax deposits, etc. Make sure you read your company’s policies on 401ks.

2. What are the advantages of a 401k plan as opposed to investing it myself?
If you choose to invest your money in an ordinary mutual fund, the gains will be taxed twice- 15% of it will be taxed as capital gains, and the remaining 85% will be part of your income- and that means it will be subject to income tax. However, if you use a 401k or some other tax-advantaged retirement account, either your contributions (in the case of a traditional 401k) or your withdrawals (in a Roth 401k), in addition to accumulated capital gains before withdrawal, are tax-free. In addition, if your employer decides to match your contribution, you get free money!

3. What are the disadvantages of a 401k plan?
First, as it is a retirement account, withdrawing from it before you reach age 59 ½ (in most cases) subjects you to a 10% penalty on top of any normal taxes on withdrawal. Therefore, it is not the most liquid investment account available. In addition, in the event that your investments lose value (rare, but could happen- see Enron), your 401k is not insured against losses.

4. If I leave my company, will my 401k plan be forfeit?
No. If you leave your company, you can roll over the assets in your plan to either the 401k plan of your new employer or an IRA without penalty.

5. If I am switching jobs, should I roll over the amount from my old 401k into a new account or contribute it to an IRA instead?
Most professionals suggest that you contribute it to an IRA and start building a new one, as IRAs offer a far wider range of investment options compared to the 401k. That way, you have greater control of your assets under the IRA.

6. What happens to my 401k if my company is bought up by another?
Three scenarios can happen:
  1. The 401k plan is terminated and any money in it will be returned to you.
     
  2. The new company keeps the 401k plan of former employees of your old company.
     
  3. The new company merges your 401k plan with theirs. This may take a few months and your plan may be frozen at the time (interest still accumulates, but you cannot make withdrawals or contributions to the plan).
7. What information and reports is my employer required to give me on my 401k plan?
According to 401khelpcenter.com, your employer must provide you with a Summary Plan Description (also called an SPD) and an annual statement of your account information. You also have a legal right to ask the plan administrator for the plan's latest Form 5500 or Form 5500-C/R. You also have the right to ask for a copy of the summary plan description, the plan document, the trust agreement setting up the plan, if separate from the plan, and any collective bargaining contract, if appropriate, any other instrument under which the plan was established or is operated. Make all requests for plan documents in writing. You may have to pay reasonable copying costs. In addition, you will often be provided a prospectus for every fund offered in the plan, but this is not legally required. If your company's stock is offered in the plan you are required to receive a prospectus on the company stock fund.

8. When can I loan from my 401k?
Most of the time, you can loan from your 401k under four circumstances: education expenses for you, your spouse, or your child; preventing eviction from your house; paying un-reimbursed medical expenses; buying a first-time residence. Except for the home-buying option, you must pay the loan within five years.

Usually, you are only able to borrow 50% of your 401k account balance, up to $50,000 dollars. Read Laws and Taxes Pertaining to Your Retirement - 401(k) for details.

9. My former employer won’t pay me back my 401k money. Whom should I contact?
You should call the Department of Labor’s Employee Benefits Security Administration (EBSA). Call (866)-275-7922 to find out where their nearest office is, then make a visit.

10. What is my 401(k) contribution limit?
In general, the limit for individual contributions is $16,500. If you are age 50 or older, you can contribute up to $22,000.



 
Last Updated on Wednesday, 22 December 2010 06:18