Statistics: The Case Investing
- In households headed by individuals aged 60 to 62 that have a 401(k) account, less than a quarter of those households have the necessary assets to maintain their standard of living throughout retirement.
- Put a different way, the median 401(k) plan holds just under $150,000 according to the Center for Retirement Research.
- Schwab has discovered that 53% of investors were more confused by their 401(k) benefits than by choosing their health-care plans.
A 401(k) plan is a tax-qualified, deferred-compensation plan in which an employee can elect to have the employer contribute a portion of his or her cash wages to the plan on a pretax basis. Generally, these deferred wages, commonly referred to as elective contributions, are not subject to income tax withholding at the time of deferral. However, they are included as wages subject to social security, Medicare, and federal unemployment taxes.
How do I enroll in my employer’s 401(k) plan?
Each plan has certain requirements that must be met to enroll in the plan. You must meet those requirements to join. Typical requirements include enrolling during an open enrollment period, reaching 21 years of age, working with the company for a year, or fulfilling a preset number of work hours.
Make sure there is no collective bargaining agreement that prohibits your participation in the plan. If you have any questions about your company’s requirements, you can direct them to your human resources personnel, your company’s 401(k) administrator, or their administrative office.
Am I automatically enrolled?
Some employers automatically enroll employees, while others do not. You need to check the details of your employer’s plan to determine requirements. If you are not automatically enrolled, they should direct you to the information needed to enroll.
Are there matching contributions?
Again, this varies by plan and is not required of all 401(k) plans. However, this is a benefit some employers offer. The benefits and the information needed to determine your employer’s policy should be in the summary plan description.
How do I evaluate my employers plan/offering?
You should ask the following questions, or look for the following data in your plan’s documentation:
- Is it part of my compensation package?
- Check for matching contributions;
- Look at the investment options and the fees associated with the account, and
- Remember, it is up to you to contribute!
- What are the fees/costs?
- They vary by plan and can be expensive “eating” into your return, and
- Make sure you check the expense ratios, and verify if there are any additional asset charges.
What information and reports is my employer required to provide me?
An annual statement is required, but many furnish quarterly and/or monthly statements.
How much should I contribute?
We suggest you contribute at least as much as an employer matches, because it is a guaranteed instant return on your money. Contributions are also pre-tax, so there is a tax benefit for your contribution to the plan.
Consider consulting a financial planner to determine your retirement needs and how much you need to save now to reach your goal. The maximum deferral is $16,500 in one year. Employees older than 50 are allowed a catch-up provision that allows an additional $5,500 in deferred contributions. The maximum allowed with employer contributions is $49,000. Those older than 50 are allowed $54,500 total.
What happens when I change jobs?
Typically, your contributions should be eligible to be rolled over into another retirement account or another plan. The employer, obviously, will stop matching contributions. There are many options to choose from and some of them have fees and penalties associated with them. Consult an expert to ensure you do not get hit with those penalties.
What happens if I get a divorce?
It depends on the divorce settlement, but the account could be attachable. You could be forced to divide it during the settlement. It does not count as a distribution in this case, unless one party chooses a cash lump-sum and does not reinvest it.
What happens if I die?
When you enroll you designate a beneficiary, so that if you were to die the plan directs the proceeds to the individuals you specify.
Is there a situation where I should not use my employer’s plan?
You might opt not to use your employer’s 401(k) plan if the investment options are not very good and the fees and expenses are very high. Unfortunately, this does occur. We suggest you investigate the options in the plan, and decide if it is worth participating in the plan. If you are unsure, consult an expert to review the plan for you before you enroll.
When am I forced to withdraw funds from the account?
Unless certain conditions are met, at age 70½ you are required to begin taking mandatory distributions from the plan. The exception is that if you are still working, you do not have to take mandatory distributions until you retire or reach age 75.
Under what circumstances can I withdraw money from the fund before 59½?
Distributions received before age 59½ are subject to an early distribution penalty of 10% additional tax, unless an exception applies. There are a few options, but they depend on whether they are offered under your plan. The three ways to withdraw funds from the plan are:
Hardships:
Generally, hardship distributions may be made only from elective deferrals, but plans may be designed with provisions to permit hardship withdrawals to be made from rollovers, transfers, and/or vested employer contributions (such as, nonelective and matching contributions). Deferral amounts are limited to what has been put into the plan. You cannot access attributable gains. Additionally, participants are suspended from deferring for a minimum of six months. Some plans will have longer restrictions, but six is the standard. There are two methods—Safe Harbor Method, which are pre-approved reasons, or Facts and Circumstances, which are Plan Sponsor Determination on reason.
In-service withdrawals:
Rollovers and Transfers
There are generally no restrictions on the withdrawal of rollovers received from another plan. However, a plan can have restrictions. “Transfer” contributions are usually limited by any restrictions that applied in the transferring plan. Thus, money purchase contributions transferred to a profit-sharing plan are subject to the same withdrawal restrictions that applied in the money purchase plan.
Voluntary After-Tax Amounts (Not Roth)
After-tax contributions made prior to 1987 may be withdrawn at any time, provided that they can be identified. The earnings on these after-tax contributions may be withdrawn, but do not have to be. After-tax contributions made since 1986 may only be withdrawn with a pro-rata portion of the earnings. There is a formula for calculating the earnings.
Elective Deferrals
Employee elective deferrals (pre-tax or Roth) may only be withdrawn as a result of hardship, or for any reason after the participant attains age 59½. If the plan’s normal retirement age is less than 59½, it is not a distributable event for elective deferrals, which generally may not be withdrawn while in-service until age 59½.
Roth Deferrals
Like pre-tax deferrals, in-service is not available until after age 59½. If you are withdrawing only a portion of Roth deferral account, the distribution must be treated as pro-rata deferral and earnings. This may cause taxation despite the otherwise tax-free status of the earnings, if it is not a qualified distribution.
Safe Harbor Contributions
These contributions are not available for in-service distribution until the participant attains age 59½, not even for hardship purposes.
Loans:
Borrowing funds from a 401(k) plan is allowable by law, but it is up to the employer if they choose to include this feature in your plan. The maximum amount of a loan is the lesser of 50% of account balance or $50,000. The individual plan can also specify a minimum loan amount. If a participant takes multiple loans, there is a special calculation for maximum amount allowed. Loans from a 401(k) are generally required to be repaid within five years, although this can be extended for a primary home purchase. Many plans will limit all loans to five years.
At Henssler Financial, we believe you should Live Ready. This includes investing in your employer-sponsored retirement plan and taking advantage of the matching contributions. Where else can you get “free money?” If you have questions about your retirement plan or would like to have your options reviewed, contact Henssler Financial at 770-429-9166 or at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
