Getting the most out of your 401k plan

I am 24 and I will be starting my first job early next month. I want to invest wisely right from the beginning and want to know all about the 401k plan. Will I be eligible for applying to my company’s 401k plan? What should I ask my employer about it? – Karen Shawn

Hi Karen,

It is not often that I get questions about 401k from someone your age, simply because a lot of people do not think about retirement until they hit 40 or more, in spite of financial experts urging people to start planning retirement early. I must say that I am pleased to hear someone as young as 24 ask questions about the 401k, which is primarily an investment for retirement. Getting to your question about eligibility, the requirements for investing in the 401k plan are usually 1 or 2 years of service, and an appropriate age, which is 21 in this case.

As you mentioned you are 24, you meet the age criteria for the 401k. However, most employers need the employee to have at least 1 or 2 years of service to be eligible for the contribution plan. Some may have less restrictive eligibility criteria for their employees – the minimum age can be less than 21 and the number of years of service can be less than 1 year. So here is what you should ask your employer about the 401k.

  1. Will your employer match your contributions? This is the first thing you should ask your employer. The amount that your employer is willing to match can significantly increase your retirement savings. Usually, employers match your contribution, but the maximum they can contribute is limited to the plan they choose and the IRS policies.
  1. What will your investment options be? Your 401k will be invested into a variety of investment vehicles including stocks, mutual funds, GICs and bonds. You can continue with the plan offered by your employer or transfer some of the investment (partial rollover) to another plan if you do not like the investment options. We recommend that you visit 401keasy.com to learn about the different investment options you have.
  1. When will you become a vested employee? – The vested part of your 401k investment will be yours for good. Even if you leave your job, the amount that goes into your 401k will remain yours. Note that the contribution from your employer will vary based on their vesting requirements.

Can you withdraw your money, and when? If you need the money before retirement, due to an emergency or a problem, then you may be able to withdraw the money from your 401k investment. Find out under what situations you will be allowed to withdraw money from your 401k account and how much penalty you should pay, if any.

Nondiscrimination Testing with 401k Plans

I want to set up a 401k plan for my auto parts shop. Do I need to ensure that it complies with the nondiscrimination regulations year after year? Michael P. Ladd, Oklahoma City, OK 

A 401k plan is a retirement benefit plan that was created with the intent of allowing employees to save in an effective manner for their future. The many benefits and tax advantages offered with these plans are all established in line with this objective. This is also the reason why the government insists that these plans are offered to all employees irrespective of their position within your business or the total compensation they earn.

To get all the tax benefits that a 401k plan offers to participants, it should give benefits to all employees, including the rank and file staff. A plan that only benefits the business owner or top level management fails to pass theIRS’s non discrimination test. This test compares the plan’s participation as well as contributions made by rank and file employees with those of top level employees and the owner/ management.

Annual testing is mandatory for all regular/ traditional 401k plans to verify that they are non discriminatory. Through this testing it is verified whether the contributions made on behalf of rank and file employees is in proportion with that made for the top brass of your business.

If you want to avoid getting into the testing and verification loop then aSafeHarbor401k is the right 401k plan for your business.SafeHarborplans are exempt from the annual non discrimination testing that is required for the other 401k types. This plan has some inbuilt features that ensures that all employees are given equitable treatment when it comes to contributions.

Talk to an investment advisor to know more about Safe Harbor 401ks and the advantages they offer for your business. If you will be using a DIY 401k package like http://401keasyonline.com/, you can browse through their website or ask their support staff for help on setting up and managing aSafeHarbor plan.