Getting the most out of your 401k plan

“Hi, I’m Janet. I’ve been interested in starting a 401K fund for my retirement. However, I’ve heard that there are several types of 401k funds and this has gotten me confused. Could you please tell me about different 401k fund options and how they are advantageous to me? Waiting to hear from you.”

Janet, West Palm Beach, FL

Good to hear from you, Janet. Also, it’s a great thing that you’ve decided to start investing in a 401K fund. A 401K is a simple way to start saving for your retirement. However, as you asked, it can be quite confusing when it comes to choosing from various types of 401K funds. Plus, employers offer their own range of funds and they name them in such a way that even similar funds sound different.

However, what you need to be aware of is that there are some basic and common funds. These are the ones you’ll come across the most and as long as you invest in any of these funds, you’re all set for the future.

Target-date funds

These are simple funds that come with a target date. The target date referred to here is the actual date on which you expect to retire. For instance, if you intend to retire in 2045, you can invest in these funds and just let them sit until you actually reach the retirement date. The asset allocations are adjusted automatically, preventing the need for rebalancing from your side. It’s a hassle-free investment option. However, there may be some extra costs and fees involved, which you need to watch out for.

Target-date funds can be rigid as well. You won’t have too much room to flex around in terms of risk.

Stock funds

Stock funds encompass a variety of stock types. You can either choose funds with small stocks or opt for funds with bigger and more established ones. You can go for international stocks as well. However, make sure you research all your stock options as you are better off investing a majority of your savings here. Ideally, most of your savings should go to stocks and the rest towards bonds.

Money market funds

The fund is basically a better version of a CD and serves as an alternative option to cash. However, the problem is that the rate of returns is limited to 1 percent per annum, which means your money does not grow with the fund. So it is best to avoid money market fund, unless you already have a substantial amount of savings, which just need a safe place to be kept in.

Blended-fund

It is like a combination of a target-date fund and a stock fund. However, a blended fund has a fixed stock-bond ratio, which is usually 50/50. So, 50 percent of your funds go to stocks and the other half goes to bonds. If you’re an aggressive investor, blended-funds are not for you. On the other hand, they are a great option for conservative investors.

Bonds/Managed income

These funds preserve your capital. You can expect little growth with these funds. However, if you have a sizable amount saved up and just want to protect the investment, with some basic growth to go along with it, then you can probably invest here.

So, Janet, we hope we’ve answered your question. However, if you want more detailed answers, please refer to the site: www.401keasy.com. The 401K Easy website contains detailed answers to all your 401K related questions and concerns.

Getting the most out of your 401k plan

Hi, My name’s Josh Tanner and I presently work as a marketing manager. I’ve been working with my current employer for more than a decade now and have a 401 (k) plan with them. Getting to the point, I’m in a financial bind of sorts now, as my daughter will be starting college soon. I desperately need the funds for her tuition fees and was told that I could take a loan on my 401 (k). Is this possible and if so, how do I go about it and what are the conditions?

Hi, Josh. Good to hear from you and your question is a very valid one. In fact, we get quite a few of these. So, to answer your first question, yes! You can take a loan from your 401(k) account. However, it all depends on the policies implemented by your employer. The 401 (k) is primarily meant to be a retirement savings fund and taking loans is usually discouraged. However, some employers do let their employees borrow from it. But, there are certain eligibility criteria to be met. For instance, some employers allow loans only in the case of medical emergencies, home loan payments or funeral expenses. Some employers don’t give out 401 (k) loans at all or there might be several conditions that you might have to fulfill. So, you will have to talk to your employer about their 401 (k) loan policies.

Secondly, as far as procedures are concerned, they are quite simple. You will, most likely, be required to fill up a set of forms. You’ll just need to enter details regarding how much you want to borrow and which investments need to be converted to cash. After which, the money will be deposited to your bank account. Other than that, you might also be required to provide specific details of your situation and provide the necessary documentation supporting it.

Here are a few more things you need to know:

  • There may be a limit on how much you can borrow from your 401 (k).
  • You will have to pay interest. Though, this interest is paid from your own account, you will still miss out on market gains.
  • You will have to pay double taxes – On the after-tax dollars which you’ll pay the loan back with and the final withdrawal which you will make at the age of 59 and a half.
  • In the case of a lay-off, you will have to pay back the loan in as little time as two months.

The positives on the other hand include low interest rates, less paperwork, and no damage to credit even in the case of a default.

Nevertheless, loans on a 401 (k) are still risky as you’ll be losing money from your retirement savings. Some employers will even prevent you from making your pre-tax contributions into the 401 (k), if you have an outstanding loan. So, think twice.

To know more about borrowing from your 401 (k) account, just visit www.401Keasy.com. The site is a great resource for all 401 (k) related queries and can come in handy.

Getting the most out of your 401k plan

Hi, I just recently quit my job to start a small business of my own. I’ve never really bothered too much about saving money, except for a few fixed deposits here and there. However, since I’m starting a business of my own, I’ve grown to be concerned about my retirement fund. While talking to a bunch of friends recently, I heard about 401(K) plans for small business owners. I wasn’t aware of a separate 401 (K) for self-employed people. Could you tell me more about this? I would like to know about the benefits of this particular 401 (K) plan.

– Richard Ortega

Hi Richard, great question. We definitely understand where you’re coming from and it’s a good thing that you’ve taken an interest in your retirement fund. Well, to start off, let me firs tell you that you are 100% right about the existence of a 401 (K) plan for self-employed individuals. Now, getting into more details, the 401 (K) Plan that you are referring to is known as a Solo 401 (K). Investment rules concerning Solo 401 (K) plans are pretty clear and direct. These plans can be operated by small business operators who have no employees or have their spouse registered as the only employee. Also, your contribution to the 401 (K) plan is not subject to your income.

You act as both, employer and employee, when it comes to a Solo 401 (K) Plan. You can make elective deferrals up to a 100% of the compensation, within the annual contribution limit. However, you need to be the primary participant in the plan. The contribution limit, as of 2014, has been raised to $ 17,500 and if you are over 50, it is $23,000.

As an employer, you are also allowed to make profit-sharing contributions. However, it must be limited to a maximum of 25% of compensation. As of 2014, the maximum amount is limited to $260,000. The total amount that can be saved in a Solo 401 (K), by both employer and employee combined, is $52,000. However, the limits are changed regularly by the IRS, depending on the inflation.

One of the better parts of having a Solo 401 (K) Plan is the amount of tax benefits you will receive. To begin with, your contributions are tax deductible and income tax is charged only when you start making withdrawals. Speaking of withdrawals, the rules are same as the ones that are used for traditional 401 (K) Plans. You are allowed a penalty free withdrawal as long as you are aged 59.5 or above. An earlier withdrawal will result in income tax payments and also, a 10% penalty. Once you reach the age of 70.5, you will be expected to take in minimum distributions from the Solo 401 (K) account. Failing to do so, will lead to a tax penalty.

Now coming to the drawbacks, we can only tell you that there are literally none. The only difficulty you might face is when you actually set up the plan.

To know more about Solo 401 (K) plans, do visit www.401keasy.com. The website is a great place to learn everything you need to about 401 (K) Plans.

Getting the most out of your 401k plan

“Hi, my name is James. I am a successful businessman, with a construction business. Recently, I was at a party where I heard someone talk about 401(k) plans. I confess, I have never thought much about them before, but I just can’t seem to forget the conversation. I have always treated my employees well. Do I really need to give them a 401(k) option?”

Hi, James. We are pleased to learn that you are taking care of your employees well. But you never know what an employee is thinking or worse, when he is considering leaving. It is also true that the depressed economic condition has given people an incentive to save. They don’t know how the economy will turn out and they want something to sustain themselves on in lean times. In such cases, offering them an investment vehicle such as 401(k) might help you retain good employees. Employees get other benefits too from signing up for a 401(k) plan. One, they get tax benefits and second, employers generally contribute, which further increases the employees’ investment corpus.

Contributing to a 401(k) plan is a simple and effective way of saving money for retirement. Employers who offer these plans become preferred employers. For instance, if an employee has to choose between an employer who is offering a 401(k) plan and another who is not, they are likely to go with the former, even if the latter is offering a little more salary.

The result, you will attract the best employees in the market. It is also a way to ensure that good employees stay with you and don’t leave for better paying or bigger competitors. Another benefit of offering a 401(k) plan is that the employee’s contribution will come out of his pre-tax salary. This means, when it is time to calculate tax liability, the employee’s taxable income is reduced by the amount he/she contributes to the 401(k) plan. This not only helps him/her to save more money but also reduces his/her tax outflow. Sounds good, doesn’t it?

Employers can also benefits from offering 401(k) plans. For example, with a 401(k) plan, you don’t have to decide where you will invest the money and second, you are not obliged to specify how much money the employee is going to get from you in case he/she leaves or retires.

We have one piece of advice for you here. Rather than signing up with an insurance or bank-based 401(k) provider, think about setting up a 401(k) account with a independent provider that offers unbundled plans. One company I suggest is 401k Easy (www.401keasy.com) because we are told their fees are low, and they offer all the same top quality no-load mutual funds’ investments (Vanguards, Fidelity Funds) and self-directed accounts (Schwab and TD Ameritrade) you can get from much more expensive 401(k) providers. Please let me know how it goes, and what you decide to do.

Getting the most out of your 401k plan

“Hi, my name’s Jen and I’m 23 years old. I just joined my first job as a software programmer. During my hiring process, I was asked if I would like to sign up for my company’s 401K plan for employees. Unfortunately, I had no clue what a 401K plan meant, though I’ve heard about it before. Could you explain to me what a 401K plan actually is and how it works? It would be really helpful for me, as I need to let the people in HR know about my decision in a couple of days. Something tells me that I should sign up for it, however, I would like to know more about it before I do.”

Hi Jen! It’s good to hear from you and I must say that the question you have asked is not really an uncommon one here. Plus, it’s never too late to ask and have yourself informed about such things.

To begin with, a 401K plan is basically a retirement savings plan for American citizens. This savings plan is generally sponsored by an employer; however, you can sign up for one even if you are self-employed. A 401K plan helps you save a certain amount of money from your salary before tax deductions are made.

Also, apart from your own contributions to the 401K account, employers also make contributions. The amount can be equal to your contribution or less than that. However, a lot of employers do not contribute at all. To know if your employer contributes to your 401K plan, you must ask them beforehand. If they do contribute equally, then take advantage of the benefit by investing as much as possible into your 401K. However, there is a limit to how much you can invest. According to the latest revised rules, you can invest a maximum of $15,500. If you are over the age of 49, you can add another $5000 to it.

401K accounts are controlled by your employers, so if you ever need to withdraw money or roll it over into a different savings plan such as an IRA, you will have to get it done through your employer. The policy even applies to taking loans from your 401K account.

One more thing you need to know is that, if you ever intend to take out money from your 401K before retirement, which is before you reach the age of 59 ½, you will have to pay taxes and penalties. However, there are exceptions to this rule.

Also, there are two types of 401K investment plans. One is a traditional 401K, where you invest money prior to tax deductions. But, if you choose to withdraw before the age of 59 ½, you will have to pay a 10% penalty. The other option is a Roth 401K, where you invest after tax deductions. However, the advantage here is that, you can withdraw the money after five years without taxes or penalties.

There is lot more to 401K plans, especially with regard to early withdrawals, self-employment and other such aspects. To know all the details, you should consider visiting www.401keasy.com. The website has all the information you need to know about 401K plans and will help you make the right decision.

Getting the most out of your 401k plan

“Hi, I just, recently, quit my job for a new one . I had enrolled into a 401(k) plan with my previous employer and would like to open a separate one with my new employer. Is it possible? What do I need to know about it? How should I get started with the process?”

Travis Jones,West Palm Beach, FL 33401

Hi Travis. You will be pleased to know that you can have more than one 401(k) plans. Thankfully, the Internal Revenue Service (IRS) does not restrict or prevent anyone from having multiple 401(k) plans. However, there are some conditions to the benefit.

For starters, there are certain limits to your 401(k) contributions. As of 2012, the IRS permits you to deduct only up to a maximum of $17,000 from your chosen 401(k) plans. If you are 50 or older, then the limit is raised to $22,000. The rule is applicable on all your plans and not just specific ones. It means is that, if you are below the age of 50 and have two 401(k) plans, then you can contribute $10,000 to one plan and no more than $7000 to the other.

Similarly, the rule also affects your contribution for lower plan limits. If your 401(k) plan has a set lower limit in terms of contribution, then you cannot contribute more than the set limit. For example, if you have one 401 (k) with a contribution limit of $6000 and the other plan has a set limit of $7000, then your total contribution in this case will be limited to $13,000 and not $17,000.

However, you also need to be aware of the consequences of making excess contributions. If you end up making excess contributions and do not correct them, you will be asked to pay taxes twice on the surplus amount. You will have to pay tax while depositing money and also while taking distributions. For example, if you contribute an excess of $5000 in an year to your 401(k) plan, then you will have to include the exact amount as taxable income when you file your tax returns. The amount will also be taxed when you withdraw it for retirement as the excess contribution does not establish a basis in your 401(k) plan. So to avoid the unnecessary penalty, you must withdraw the excess amount before filing your taxes. Also, the 10 percent early withdrawal penalty does not apply to the correction of excess contributions.

There are quite a few benefits to owning multiple 401(k) plans. To know more about the topic, consider visiting websites such as www.401keasy.com. You’ll find all the information you need about 401 (k) plans on the website.

Getting the most out of your 401k plan

“Hi, I just quit my job and would like to empty my 401k account to support me till I find a new one. I contacted my HR rep at the previous company and he told me that I was allowed to withdraw the money only in the case of a serious “financial hardship”. Is this true and what is the definition of a financial hardship with regard to withdrawing my 401k? Is there any other way I can withdraw my 401k apart from “financial hardship”?

– Tony Baker

Hi Tony,

This is not an uncommon question and I get quite a few asking the same thing. This particular question does the rounds because most employers fail to provide adequate information to their employees about the 401k plan. Especially,when it comes to withdrawal options and conditions.

Getting to the point now, the first thing you need to know, Tony, is that a 401k is primarily a retirement fund to help you out in your old age. It is not some sort of piggy bank savings scheme from which you can withdraw money whenever you like.

However, as your HR rep mentioned, the 401k fund can be withdrawn in case of a financial hardship. However, even hardship withdrawals come with a 10 percent penalty for early withdrawal and you will have to fulfill certain conditions. These conditions will also answer your question about the definition of a financial hardship.

So, financial hardship under 401k means covering costs related to medical expenses, funeral expenses, fixing damages to your primary residence, and to cover costs that prevent eviction or foreclosure. You can also claim a hardship withdrawal if you are planning to go to college. It will cover your tuition fees and other associated expenses such as accommodation or boarding.

The other withdrawal option is a penalty-free one, but you will be required to pay taxes equal to standard income tax rates. Just like the conditions in the previous hardship withdrawal option, the penalty-free hardship withdrawal also comes with certain conditions. They include covering costs in the case of a disability that prevents you from continuing your employment, medical expenditures within the allotted limit, and for court ordered payments towards divorced spouse, children or dependents. You can also claim the penalty-free hardship withdrawal if you have been allowed a relief by the IRS in the case of a disaster.

Penalty-free hardship withdrawals are also valid in the case of an early retirement. However you must establish a fixed regular withdrawal schedule for a period of 5 years or up to the age of 59.5, whichever is applicable in your case.

I suggest you do some research to know more about 401k withdrawals. Websites such as www.401keasy.com have a lot of information about 401k plans, including information about withdrawals. So, take a look and you’ll get to know your options.