Now that Labor Day has come and gone, it’s time for another holiday that recognizes workers: 401(k) Day. Though this holiday may not provide a day off or a reason to fire up the grill, it is a time to reflect on your 401(k) status. Do you have a 401(k)? If not, how can you get one? If you have one, you may still have some questions about how it works. Here are a few Q’s and A’s on 401(k)s to start off your 401(k) day celebration!
Q: What is a 401K?
A: A 401(k), a type of defined contribution plan, is a savings arrangement through which you can set aside money for retirement. If you work for a tax-exempt organization, you are eligible for a 403(b) instead, which works in the same ways as a 401(k). The money you contribute to a 401(k) is taken from your paycheck before taxes. You choose how to invest it and you are only taxed if you withdraw money. You can withdraw money without a penalty at the age of 59 and a half.
Q: How do I become a member of the retirement plan at my job?
A: Talk to your employer or Human Resources director about how to join the retirement plan at your job. By law, your employer decides who is covered by the plan. If you are a part-time or contract worker, you may not be eligible to join the 401(k) program at your job.
Q: Can I withdraw money from my account while I am still working?
A: Yes. According to the September 2008 Kiplinger Retirement Report, “88% of plans in 2006 allowed participants to take loans…Under IRS rules, the loan amount generally must be less than 50% of the account balance.” If your plan does not have a loan provision, you may be able to qualify for a severe financial hardship withdrawal. According to the IRS a hardship withdrawal includes the following:
- College tuition for you or your dependents
- A down payment on a primary residence
- Non-reimbursed medical expenses
- Preventing eviction or foreclosure from your home
Check your plan document and consult your Human Resources director. But remember: if you choose to withdraw from your 401(k), you may face penalties and you will lose compounded growth on the money you borrowed, which will reduce your overall retirement savings. Make sure you are aware of the borrowing rules associated with your 401(k) and create a personal plan to repay your 401(k) loan to avoid taxes and fees.
Q: Can I stop contributing if I feel I can’t afford to?
A:Most plans allow you to stop contributing at any time though employers are not required by law to do so. Some plans may require specific percentage contribution for a full plan year so be sure to check your plan rules.
Q:What happens to my 401(k) account balances if I choose to leave or am fired from the company?
A:First, remember that it usually takes five years to â€œvestâ€ in the money contributed by your employer. So donâ€™t lose out by leaving your job too soon!
Your options are the same whether you voluntarily leave or are terminated. If your account balance is more than $5,000.00, you can leave your money in the plan. To avoid a penalty, your vested account balance can be rolled into another 401(k) plan with your new employer or put into an Individual Retirement Account.
For more information, check out the Retirement Plans section of WISER‘s website. Some of the questions featured here were adapted from information provided by David Wray, President of the Profit-Sharing Council of America. The Profit Sharing Council of America established and sponsored 401(k) Day. Their website, www.psca.org, as well as their 401(k) day website, www.401kday.org, offers a wealth of information on 401(k)s for every generation.