I don’t have any debt. Do I still need a 401K plan?

Q: I have managed to pay off all my debt, even my massive student loans. I am completely debt free now. I know that 401K plans are great for retirement savings but do I really need them even though I have no debt and that means I don’t have any recurring drain on my finances? Why can’t I just save through regular methods like bank FDs or stock market investments or other things like these? Please advise- Joyce, New Jersey.

Ans: Joyce, it’s good that you have paid down all your debts and that you are debt free now. That’s a very important move if you want to have a financially secure future and an anxiety free retired life.

Now to move on to your question, yes, you DO need a 401k plan even if you have no debts to pay off. Yes, you can surely save through the regular methods, like you have mentioned, stocks, CDs, FDs, bonds etc. The big difference is that, with these, you have no tax advantages that can cut down your payment to Uncle Sam. Also, the risk factor that you take on with investments like say, stocks, is really high but with a 401K plan you have the advantage of diversifying your investment into many options that are chosen by YOU. You can easily clamp down on your risk with the 401K and that’s something that becomes a huge advantage as you near your retirement age.

Here is another very pertinent factor to consider too: Does your employer put in his own money in your investments in CDs or Bonds or FDs or stock? Absolutely not! But with 401Ks, your employer may make contributions that are equal to your own. That translates into free money for you to put away for your retired life. You don’t really want to say ‘NO’ to free money do you?

With so many benefits to offer, 401K plans are the smart choice for anyone who is financially savvy. Plus, go with a reliable provider like www.401keasy.com and setting up the account, making contributions and tracking it is all so easy that it just takes a few minutes of your time each month. Don’t ignore the fantastic saving opportunity that these plans present to you, Joyce. Go open your account right away and make sure you ask your employer about matching contributions too.

What happens to 401K if the employer goes bankrupt and the company shuts down?

Q: I have been working at this company for about five years now and I have a 401K plan through them. I have been hearing that the company has been making losses for quite some time now and that they are on the verge of bankruptcy. If they do shut down, do I lose my 401K savings? Should I withdraw all the funds right now, to play safe? Please advise- Stephen, Dallas.

Ans.: Stephen, there is no need to panic and there is absolutely no need to withdraw your money from the 401K plan. In fact, I recommend that you DO NOT do this because you stand to lose the range of benefits that come from investing in this plan which comes with a clear tax benefit.

The 401K account that employees like you have is not held by the company itself. The company’s management or accounts personnel have no access to your money in this account either. In case of a company facing a bankruptcy, there is no way for anyone, except, the account holder, that is, you, in this case, to utilise the money in the 401K or divert it in any way.

Now what happens if the company does shut down? Well, the 401K plans will most likely be terminated. That does not mean your money is gone. All you may have to do, if this happens, is to roll over the savings that you have accumulated in this account to another one. The smart move here is to roll the cash over into another retirement savings account that offers tax benefits. An IRA is a good option for you because it lets you avoid paying taxes on the sum and you can also avoid the premature withdrawal penalty by simply switching over to a traditional IRA. Also, you do want to continue saving for your future, right? The IRA gives you the perfect opportunity to continue doing so.

What you should be doing right now to safeguard your interests and avoid anxiety is keep track of your 401K. Get your HR department to give you information about the 401K account so that you can create a login and access it online at your leisure. Also do some groundwork about other retirement savings plans that you may be able to opt for, in case this one is closed down because of company closure. If your plan is held with providers like www.401keasy.com, this should not be a problem at all because the focus here is on user friendly interface, customer service and ease of use!

Getting the most out of your plan

Hello, my name is Steve and I am pretty confused about my 401(k) plan. I heard my new colleagues discussing about vesting. I do not know what it is. Since I am new to this office, and an introvert, I do not have the courage to ask what it means. I have another query too: can I borrow from my company 401(k) amount?

That’s an excellent question, Steve. Vesting is an important part of the 401(k) plan which most people are not aware of. It refers to ownership rights of the account balance of a 401(k) plan. It means any funds contributed by you, as per under Employee Retirement Income Security Act constituted in 1974-or ERISA as it is colloquially known- is completely owned by you with zero forfeiture risk. You should keep in mind, however that any contribution made by your employer on your behalf could be subjected to a certain vesting period. This refers to the minimum amount of time you must work for your present organization before you gain rights to company contributions to your account. Such vesting schedules could vary from one company to another. As an employee, you could be phased into complete ownership rights over a period of many years. When you are fully vested, it means you have earned complete rights over the money your company has contributed to your 401(k) plan.

To get a clearer picture, let us take an example. Your company may have already begun to contribute to your 401(k) plan just after you began to participate in the plan. In case the plan has a vesting requirement of a year, you will enjoy complete ownership rights only after you remain in employment with your company for a minimum of a year. Once you complete the period, you are completely vested in the contributions of the employer and you can go forward.

About whether you can borrow from your 401(k) plan, the short and sweet answer is yes, the plan permit loans. Do note that the maximum amount of money you can possibly borrow is less of the 50 percent of vested account balance. Alternatively, a maximum of $50,000. Do understand that every plan is unique and a few companies have particular conditions under which the loan can be availed. To give an example, your employer could state a minimum amount as a loan. It is also possible that the company could restrict the maximum number of loans outstanding at any given time.

Why don’t you visit https://www.401keasy.com/? It is the best place to gain knowledge about the 401(k). It is a treasure load of information about this important financial component in your life.

Understanding asset based charges

A friend of mine has started a 401k program for her employees recently and she says she is paying a number of fees pertaining to it. Among these, she mentions something called the asset based charges. What are these and is there any way I can avoid these charges when I set up my 401k account?- Gina Williams, Fort Lauderdale- starting up a pet care service and veterinary service.

Gina, many 401k plan providers do charge different types of fees when they set and manage your plan. Some of them are quite transparent and upfront about these and they let you know exactly what fees they charge and why. There are others who may be advertising no fee or low fees yet charging these and many other fees, and you end up paying them without even knowing that you are doing so. A good way to avoid hidden fees like these is to opt for a small business 401k plan provider like https://www.401keasy.com/, where the focus is on client needs and client satisfaction. Another advantage of going with https://www.401keasy.com/ is their easily customizable plans, their excellent support and comprehensive mutual funds offerings. Now, let’s give you a quick understanding of what these asset based charges are.

Asset based fees are charged against all of the assets you have in your 401k. They come out of the employee account balance. Usually, they are charged as a specific percentage  of the account balance, debited annually. For instance, your 401k provider may charge your 1% as asset based charges meaning that $1 out of every $100 in account balance goes to him in the form of this fee. Clearly, you can see that the provider is making money when your asset based charges are high.

So what are these fees typically used for? Well, you may think that any fee charged by your 401k provider goes toward money management. But with asset based charges, this is not all that this money is used for. They may also be paying for financial advisors, third party administrators record maintenance, investment management and more. A mutual fund that is charging asset based fees may keep a part of the money collected for its money management, forward a part to financial advisors, earmark another part for other parties to be paid through the record keeper and so on.

The best thing for you to do is check thoroughly to ensure that your 401k provider specifically guarantees ‘no asset based’ charge, if you are keen to avoid these costs.

Getting the most out of your plan

Hi, I’m Richard and I run a small IT services company. I have a small group of employees working for me and recently, I decided to set-up 401(K) accounts for them. While inquiring about 401(K) plans for this purpose, I came across something known as a Safe Harbor 401(K) plan. What kind of plan is this? Could you please care to explain?”

Hi Richard,

It’s great to hear from you and like we always say, we’re simply here to help people like you. Now coming to your question, Richard, we would like you to know that this one of the more rare topics we come across. Wondering why it’s so rare? Well, it’s rare because the Safe Harbor 401(K) option is something that most people don’t opt for.

It’s an investment option that only complicates things, especially if you’re running your own business. So, instead of making you guess, we’ll just get down to helping your figuring out what goes on with a Safe Harbor 401(K). After you get a fair idea about the plan, you can go ahead and make a decision about whether this plan suits your needs or not.

The first thing about a Safe Harbor 401(K) is that the business owner is expected to make necessary contributions as matches. At first, these plans might seem great, but, if you have fewer than 25 employees or are okay with making the necessary employer contributions, you will have to dig deeper.

There are a few benefits to this type of 401(K) plan. You can make maximum contributions to your own account. However, you are also required to make matching “safe harbor” contributions to the accounts of your employees as a percentage of their compensations. What this means is that both, you and your employees, can increase tax-deferred contributions without being subject to the restrictions normally imposed on a traditional plan that does not need matching contributions.

The key contribution features are:

  • The maximum salary deferral contribution can be made by all participants.
  • The contributions can either be Roth deferral contributions, pretax, or both.
  • The overall contributions from employers and employees should not be above $ 52,000 or 100% of income per participant.
  • The employer must match employee contributions i.e. 100% of the initial 3% of salary and 50% of the remaining 2% of salary. Or else, they must offer a non-elective contribution i.e. 3% of salary for each eligible employee.

Here are a few things to consider:

  • Safe Harbor contributions and employee deferral are instantly vested.
  • The plan can be a complex one. You will need an administrator to oversee compliance, record keeping, testing, IRS Form 5500 filing, and maintenance.

These are some of the core features of a Safe Harbor 401(K). To access more detailed information, we suggest that you take a look at www.401keasy.com. 401K Easy has all the information you need about Safe Harbor plans.

Getting the most out of your plan

Hi, I’m Janice. As of this writing, I am in a financial soup. I need money urgently to make some payments and I was thinking whether I can do a hardship withdrawal from my 401k to get a cash infusion. However, I am not entirely sure of the ramifications. Can you please advise me on the same?

With the next presidential election approaching, it is difficult to tell what turn the economy is going to take. As the strained times continue, doing a hardship withdrawal from your 401k account is very tempting. Before you tap into the retirement savings, you need to understand the rules and have a clear idea of the consequences.

According to the IRS guidelines, a hardship withdrawal must only be made in the event of a heavy and immediate financial need. Moreover, the amount you withdraw must be absolutely necessary to fill the financial need. The employee’s need also includes the need of a dependant or a spouse. A withdrawal is regarded as heavy and immediate if you make it for any one of the following reasons:

  • To prevent foreclosure or eviction from your primary residence.
  • If you have expenses related to the purchasing of a primary residence, not including mortgage payments.
  • Education expenses (post-secondary) for the upcoming 12 months either for you, your spouse or your dependants.
  • Improvements or qualifying expenses for your primary residence.
  • Funeral expenses.

While the IRS rules make an allowance for the aforementioned withdrawals, it is not necessary that your plan allows them. Your plan provider can also limit the kind of hardship withdrawal that they allow. Withdrawing money from the retirement account sounds easy, but there are substantial drawbacks to it.

In a lot of the cases, such withdrawals are subject to taxes and 10 percent penalty, unless you meet certain criteria. In some of the cases, if an employee utilizes the hardship withdrawal, it restricts the investor from making any further plan contributions for six months or more.

Apart from the immediate costs of getting your hands on the funds from your retirement account, there are certain long-term consequences to the action that you will not realize for some time to come. The money that you remove from your account will no longer receive the benefits of compounding and growth over time. This is also applicable for contributions that are made to the plan in the restricted period following a withdrawal.

Desperate time call for desperate measures, but before you dip into your 401k to ease your financial bind, consider the immediate costs and the long-term impact on your retirement goals. If you want to get more in-depth information on your 401k, visit 401keasy.com. It is the most comprehensive 401k resource on the internet and you are sure to find answers to all the tricky questions you have.

Getting the most out of your 401k plan

Hi, I’m Tim. I’m writing this mail to you because I’m a little clueless about what to do. Well, it’s been almost a year since I quit my former company and I’m about a join a new one. But, the problem is I still have a 401K with my former employer. The thing is that I’m not interested in cashing out and paying penalties. Is there anything else I can do with the account? What are my options?”

Hi Tim. Thanks for writing in. We completely understand the situation you’re in right now. Changing jobs is exciting, but it also brings in its fair share of confusion and complications. In your case, it’s the good old 401K. Well, Tim, first off, let us remind you that your 401K funds are a very important part of your savings. So, when it comes to handling an old 401K, you have quite a few options. However, you need to see which one suits your requirements the best.

We’ll explain one of these options to you, so that you can have an idea of what needs to be done.

The first option is to leave the 401K active and under the control of your old employer. It’s not very uncommon for some companies to allow this. However, do go through your former employer’s policies on retirement plan assets to make sure you can do this. If they do provide that option, then it’s a fairly wise idea to keep the 401k with them. We say this because there are quite a few advantages. For starters, your investments will enjoy tax-free growth, while giving you time to explore various other options.

If you do retire at the age of 55, then you can start making penalty free withdrawals. Also, you might enjoy the benefits of having specialized or low-cost investment options, which may not be possible if you roll-over your old 401K into an IRA.

If your old 401K comes with certain money management services, then you might want to retain them. However, that is only possible if the 401K remains with your old employer. Lastly, a 401K enjoys more creditor protection than other investment options such as the IRA.

Now, coming to the downside of keeping the 401K with your old employer, there are quite a few. To begin with, you can’t make contributions or get a loan. Then, you’ll have to make do with a limited number of investment options.

Lastly, you may not have too many options for withdrawal. For instance, you might be forced to withdraw your entire investment instead of making a partial withdrawal.

So, Tim, this is just one possibility that we’ve explained to you. However, you do have other options, which include rolling over your old 401K into an IRA or into the new employer’s savings plan. To know more about these options, visit www.401keasy.com. 401K Easy is probably the best 401K resource you can find on the web and we guarantee that you’ll find all your answers here.