FW Finance FAQ: 401(k)s

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This FAQ will be a resource for information on employer-sponsored 401(k)s. SeattleNative has already made a great FAQ on IRAs, so this will only address those to the extent of providing information on rollovers. Depending on demand, this may include information on 403(b)s and 457s in the future.[Q]General401(k) are tools to invest in your retirement. You will usually have a small menu of stocks, mutual funds, bonds, and/or money markets to choose from. Many employers will match some portion of money you choose to take out of your paycheck to place in your 401(k). Using a 401(k) will lower your take-home pay, which lowers the taxes you have to pay in the near future. Your contribution will grow tax-deferred until you withdraw money from it. You can invest 12,000 a year into the plan. You can withdraw with no penalties at age 59 1/2. If you are no longer with your employer at age 55, you can withdraw without penalty (10%), but will have to pay taxes. Withdraw without penalty can also be done if you become disabled, die, are required to by a court, or if you have significan medical bills (7.5% of your AGI). You must start to withdraw at age 70 1/2.[Q]Contribution LimitsCatch-up contributions are eligible for employer matching. They are allowed only for employees who are over 50. Not all employers offer them.
Year Limit (Catch-up)
2004 $13,000 ($3,000)
2005 $14,000 ($4,000)
2006 $15,000 ($5,000)
2007 and beyond are indexed to inflation
Note that these are limits on your personal contribution, not including employer matching, but including all of your jobs. Note that these are maximum contribution limits & other limitations which would lower the amount you can contribute may apply. This can include your salary and the rules of the particular 401(k) you are participating in. A significant limitation being that if the maximum percentage of your salary that your employer allows you to put in a 401(k) is under these limits, you will be confined by that limitation.[Q]ThreadsBasics: Should you invest in a 401(k)? Or maybe an IRA?
401(k)s, IRAs, and other investment tools
Differences between 401(k) and IRA
Investing in both
Take two
Take three
Take four
Roth-401(k)
Could a taxable account be better?
Another thread on advantages/disadvantages of cheaper funds in taxable accounts
403? 457?

How to get a 401(k) if your are self-employed or through your employer
Self-employed? Where to put your money:SEP 401(k) or SEP IRA
Again
More on the two
More on SEP 401(k)
Or a SIMPLE?
More on 401(k) alternatives for contractors and the self-employed
Discussion of employers, some of whom provide 401(k) and match contributions
If you want to supply a 401(k) to a small number of employees

What to invest in
What kinds of funds to invest in
Which investments to keep in an IRA, 401, and taxable

Performace/Comparison
How'd you do in 2005?
How big's your match?

Contribution Strategies
How much people put in, depending on employer's match
Should you contribute if you have a low salary
Optimize your contributions
Heavy front end contribution or even contributions?
Related discussion
How some FWers use or don't use 401(k)s and why; what they think of stocks/bonds
Is it worth contributing to a 401(k) past the employer match?
How many max out their contributions?
What happens if you over-contribute?
Do contribution limits change if you invest in other retirement accounts?
How to retire early

Vesting
All about vesting
Vesting more after you quit?!

What to do when you leave your job, including roll overs
Federal law allows you to leave your money in a former employer's 401(k) if you have at least $5000 in the plan
But do you want to?
If it is between $1000 and $5000, your employer is allowed to automatically roll it into an IRA on your behalf. Most will allow you to choose to roll it over to an IRA or to your new employer. Some will let you keep it there.

There are advantages and disadvantages in rolling over to an IRA
The choice in what you can invest in and how much it costs to do so are important factors. Taxes and penalties can be hazardous! You can't roll over unless you leave the 401(k) completely. You can roll over long after you leave your employer. Also covers comingling rules if you rollover to IRA.
More on rollover
And more!
Rolling over multiple 401(k)s
403 providers are allowed to accept rollovers from a 401
Taxes on rollovers
Transfer fees
You can't rollover when still employed with the company that holds your 401
And what to do when your former employer decides to cash out your sub-$5000 account
A followup
Have you forgotten about a 401(k) account from a previous job?
In-service withdrawals

Problems with your 401(k)
How long can employeers wait to put your contribution in your account
What to do when payroll screws up (a missed deduction).
Or if the employer doesn't deposit the money at all
Or takes money out when you don't think they should
Lower or elimination of matching
Company declared bankruptcy? Your 401(k) should be fine.

Borrowing from yourself
No impact on your FICO score
Withdrawing early or borrowing for home purchase or to tithe yourself over
More of the same
Still more
More on disadvantages of borrowing against your 401(k)
401(k) Loan vs HELOC
Yet another borrowing for a home thread
Another comparison
It really isn't a great idea, but that doesn't stop more people from asking
So how should you save for a house?

Fees
Fees in general
Termination Fees
Administrative Fees
Other fee-related problems
Proposed NJ Taxes

International Concerns
Should H1Bs invest?
Retirement accounts when leaving the country
More
Taxes/Fees for non-citizens

Other Special Cases
Highly compensated employees
Even short-term employees benefit from a 401(k)
Accidental over-contribution
Don't deduct taxes if your 401(k) loses value
What may happen to your 401(k) in a divorce
What to do with inherited 401(k)s
An interesting thread on 401(k) credit cards
Roth 401(k)[Q]Websites401khelpcenter
They also have a forum
Google Directory
mpowercafe
ROTH 401(k)

Member Summary
Most Recent Posts
avalon007 said: <blockquote><hr>Didn't see it anywhere but can I withdraw money penalty free from a 401k to pay for my c... (more)

SliverOfFear (Apr. 07, 2006 @ 6:34p) |

avalon007 said: <blockquote><hr>Didn't see it anywhere but can I withdraw money penalty free from a 401k to pay for my c... (more)

LH2004 (Apr. 07, 2006 @ 11:26p) |

this issue came up in another thread.<br><br>maxing out on 401k too early in the year may trigger the loss of company ma... (more)

scorched03 (Apr. 12, 2006 @ 11:15p) |

Quick Summary is created and edited by users like you... Add FAQ's, Links and other Relevant Information by clicking the edit button in the lower right hand corner of this message.
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Great job Naksagt! Good information in an organized manner! The financial way! <img src="i/expressions/face-icon-small-wink.gif"border=0>

Azurik said:

<< Great job Naksagt! Good information in an organized manner! The financial way! <img src="i/expressions/face-icon-small-wink.gif"border=0> >>

Ditto! Great effort, Naksagt.

Thank you both for your kind comments. I will be happy to update this post with the latest on investing for retirement.

Bumped for added contribution limits, growing thread on rollovers.

Some very interesting 401k statistics in the September 2003 issue of "Kiplinger's Personal Finance". I thought this an appropriate thread to post them.

From "The Kiplinger Monitor" column "401(k) Assets | A mixed bag"

$129 Billion
*Total value of 401(k) investment losses in 2002.

$49,000
*Average account balance at the end of 2002, down just 2.5% from a year earlier, thanks to ongoing contributions.

-6.3% versus -14.6%
*Median annual return for 401(k) accounts versus the S&P 500 for the three-year period ended December 2002.

52%
*Proportion of all 401(k) assets in stocks at the end of 2002, down from nearly 70% in 2000.

42%
*Percentage of 401(k) assets held in company stock for the average participant who owns company stock.

47%
*Percentage of participants who believe they contribute the maximum to their 401(k).

11%
*Percentage of participants who actually contriubte the maximum to their 401(k).

27%
*Active participants with a balance of less than $5,000.

Sources: CIGNA Retirement & Investment Services, Hewitt Associates, Society of Professional Administrators and Recordkeepers, Vangard Group.

This is an excellent FAQ topic. I recently switched employers. My new employer offers a 401(k) plan open to employees right away (you don't have to wait a year to participate like in some companies).

Has anyone else just started a job and jumped right into the 401(k) plan?

PS For some FatWallet humour, for those who are hyper-investment-focused, is there a 401(j) plan? What's that about? <img src="i/expressions/face-icon-small-happy.gif"border=0>

SeattleNative said:

<< Has anyone else just started a job and jumped right into the 401(k) plan? >>

I would be able to at all the jobs that I applied to a year or so ago that offered 401(k)s at all. At some, the match was variable & I think could be based on how long you were with the company.

<< PS For some FatWallet humour, for those who are hyper-investment-focused, is there a 401(j) plan? What's that about? <img src="i/expressions/face-icon-small-happy.gif"border=0> >>

401(k) refers to the section of IRS code that created the plans.

Interestingly, in last year's tax reform bill Congress raised the dollar amount we can contribute to 401(k) accounts. You can contribute as much as 100% of your earnings up to a maximum of $12,000 in 2003, $13,000 in 2004. This allows those of us who like the 401(k) investment offerings a chance to shelter a lot of our earnings from current taxation and enjoy tax-deferred growth.

For investors interested in making regularly-scheduled periodic investments in a broad-based mutual fund, 401(k) accounts can be a great way to dollar-cost average as the share prices fluctuate over time.

By the way, many public-sector and nonprofit employers offer a slightly different program called a 457 plan (or "Deferred Compensation". These plans are quite similar to the 401(k). Some plans do not offer an employer match while others do.

SeattleNative said:

<< By the way, many public-sector and nonprofit employers offer a slightly different program called a 457 plan (or "Deferred Compensation". These plans are quite similar to the 401(k). >>

This is right. You should note that they may offer a 403(b) in addition to or instead of a 457.

Bumping for recent updates.

Now is the time to adjust your 401(k) to meet the higher contribution limit for 2004 ($13,000).

Is 59 1/2 age to withdraw without penalty same for all 401(k) plans or some have different age limit? Thanks.

jonaB said:

<< Is 59 1/2 age to withdraw without penalty same for all 401(k) plans or some have different age limit? Thanks. >>

It it the same. It is part of the tax code.

Bumping thread for recent updates.

You should include a section in the FAQ on people who are "highly compensated" according to the IRS.

I know this is a "terrible" thing to encounter, but if you have $90k in compensation the previous or current year, the IRS considers you "highly compensated" and you are limited to 15% contribution to IRA.

Normally, this makes sense as $95k*.15 = $13500. However, as my wife and I found out, this includes all compensation. Because we moved to the Bay Area and housing is so expensive, her company paid part of our mortgage for the first 2 years. This counts as "income" even though you obviously can't use it for 401k purposes. Her company also does not allow 401k contributions from your yearly bonus. Because of these two items, she just crossed the $90k income limit.

The problem is that her salary is not actually that high, but she is limited to the 15% contribution limit. Therefore, she can only contribute around $12k to a 401k this year.

I had never heard of this rule before so just wanted to make sure others knew about it.

Bump for recent updates.

[Q]<< Is 59 1/2 age to withdraw without penalty same for all 401(k) plans or some have different age limit? Thanks. >>

It it the same. It is part of the tax code.


Not necessarily true. The age 59 distribution rule says any 401k participant or IRA owner may begin to withdraw money from his or her plan after reaching the age of 59 without having to pay a 10 percent early withdrawal penalty. There is an exception to that rule, however, which allows an employee who retires, quit or is fired at age 55 to withdraw without penalty from their 401k (not so with an IRA).

There are two key points to remember. First, this exception applies if you leave your job at any time during the calendar year in which you turn 55, or later, according to IRS Publication 575. Second, you can only take money from the 401k plan of your last employer. That means if you left money in the plan of a former employer, you'll have to wait until age 59 to start taking withdrawals without penalty.

You can withdraw funds from your 401K at any age penalty free, though it is usually not the best course of action. Do a google search for substantially equal payment 401K.

401khelpcenterdotcom said: [Q][Q]<< Is 59 1/2 age to withdraw without penalty same for all 401(k) plans or some have different age limit? Thanks. >>

It it the same. It is part of the tax code.
Not necessarily true.Sorry--I should have been more clear. The question seemed to really be if different plans can have different distribution requirements (which they can't), rather than ways to withdraw early (which you enumerated). Thanks for adding the additional info to the thread!

Bumping for recent updates & to prevent archiving.

Bumping. Not to put yet another FAQ on top, but because I have made updates.

Excellent FAQ thread - glad to see it updated. You might add 401(k) Credit Card to access your retirement funds?

This is probably a stupid question, but when the IRS says that you can contribute $12k into your 401k per year, are they just counting the money that you put in or is that $12k what you put in plus the employer match?

sandmanwake said: [Q]This is probably a stupid question, but when the IRS says that you can contribute $12k into your 401k per year, are they just counting the money that you put in or is that $12k what you put in plus the employer match?

(Assuming you are under 50 years old this year) As an employee in a defined contribution plan, you are allowed to defer $13,000 of your salary into a 401k (not $12,000). The maximum defined contribution limit (employer match, etc.) is $41,000. This is for 2004, and will go up slightly for 2005.

SeattleNative said: [Q]Excellent FAQ thread - glad to see it updated. You might add 401(k) Credit Card to access your retirement funds?Added. For future reference, I do try to update the thread every ~2 months. I look over the new threads that have been posted since my last update & add the ones that cover material that isn't in previous threads or which are extensions of archived threads. So, I would've eventually gotten the 401 CC thread, but it is definitely interesting enough to add now. Thanks for the suggestion.

bump

can anyone tell me what is the deadline for company to put money into person's acct. after it's deducted from paycheck?

politics aside... does anyone actually KNOW how the individual retirement accounts that Bush is proposing will work?

wannabuycheap said: [Q]can anyone tell me what is the deadline for company to put money into person's acct. after it's deducted from paycheck?Your employer shouldn't make money off this float--IRA deductions are due to your 401 broker the same time your paycheck would be due to you. If this doesn't happen, you can treat it as if they didn't give you a paycheck in full--usually by complaining to the DOL. See this thread for more. Now the hold-up can sometimes be from the 401 broker. Normally, though, employers give the 401 broker a check the same time you get yours & the broker gets money into your account very quickly.

Crazytree said: [Q]politics aside... does anyone actually KNOW how the individual retirement accounts that Bush is proposing will work?He has actually made a few models & it is really up to Congress to hammer-out a lot of details. Here is a recent article I found on google news that discusses one of his plans.

BUMP. Finally updated with more great threads & also (I hope) better organized for easier use & to cut down on the MANY repeated questions I saw as I was doing my update.

Thanks! Nice job btw!

Great thread, thanks OP!

[Q]
Year Limit (Catch-up)
2004 $13,000 ($3,000)
2005 $14,000 ($4,000)
2006 $15,000 ($5,000)
2007 and beyond are indexed to inflation
Note that these are limits on total contribution, including employer matching and all of your jobs

The limit does not include employer matching.

bluegenie said: [Q]The limit does not include employer matching.Good catch. I thought I had added a column listing the absolute maximum limit from all sources per year in a previous revision. Obviously I hadn't. I rephrased it & may add this column in the future. Thanks!

Bumped for new threads & a few fixed links.

Somewhat related, I found this website to be usefull in getting info on 403(b). TSA's for teachers and such.... Please add if you think it is useful. Thanks!
403bwise.com

Bump for an important FW FAQ.

slimcustomer said: [Q]Bump for an important FW FAQ.Thanks for the bump. Added a few more links today.

Skipping 15 Messages...
this issue came up in another thread.

maxing out on 401k too early in the year may trigger the loss of company match until the next year.

I could be wrong, but from what i've seen the match is X% per paycheck. If the person hits the max too early, its possible to lose the company match from the period the max is hit til the end of the year. but then again, wording on 401K differs so something to potentially watch out for.



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