Retirement: Frequently Asked Questions
Q: What is a 401(k) Plan?
A: A 401(k) plan as designated by the Internal Revenue Code, allows you to make regular, tax-deferred payroll contributions from your salary into an investment plan. You pay no state or federal taxes on your deferred salary contributions or your investment earnings until such time as these dollars are distributed from the Plan.
Q: Why would I want to defer to a 401(k) Plan?
A: Here are four very good reasons:
Discipline. Most of us know we need to save and few of us have the discipline to save out of our spendable income. A 401(k) plan is a self-imposed, "forced" retirement plan. It gets withheld before it can be spent.
Tax Deferral. Money that would have gone to pay state and federal income taxes can now be working for you inside your retirement plan, growing at a compound interest rate.
Maximize Employer Contributions. Many 401(k) plans today have a "matching" feature, which allows employers to match dollars you put in with employer contributions. These matches are usually limited to certain amounts and are not contributed unless you defer out of your salary.
Need. Most people today know the trouble Social Security is in. It was always meant as a supplement. Experts say your retirement should come from three sources: 1) personal savings, 2) company pension, and 3) Social Security. If you are not planning adequately for your retirement, you may be forced into a lifestyle you have no control over.
Q: How does the Plan work?
A: You enroll to contribute to the plan with before-tax dollars. Contributions are deducted each pay period from your gross pay. (Your company may also elect to contribute to employees' accounts by matching all or a percentage of your contributions.) You decide if you want to make contributions and how much you want to contribute. You enroll to contribute to the plan with before-tax dollars. Contributions are deducted each pay period from your gross pay. (Your company may also elect to contribute to employees' accounts by matching all or a percentage of your contributions.) You decide if you want to make contributions and how much you want to contribute.
Q: How do I enroll?
A: You need to complete an Enrollment Form and a Beneficiary Designation Form to begin contributions to the Plan. The Enrollment Form authorizes your employer to payroll deduct the deferral amount (or percentage of salary) you want to contribute to the Plan and how you wish to invest your money. The Beneficiary Form designates who will receive your account should you die.
Q: How much money can I defer each year?
A: The maximum deferral limit a 401(k) plan participant may elect in 2014 is $17,500 for individuals under age 50 and $23,000 for individuals age 50 and over. Maximum plan contributions to a participants account is 100% of pay or $52,000. ($57,500 for those with catch-up).
Q: Can I change my deferrals?
A: You will have an opportunity to raise, lower or stop your contributions at certain times of the year. You can also make changes in how your money is invested or shift your money from one account to another.
Q: What tax advantages does the 401(k) Plan offer?
A: There are two major tax advantages to the 401(k) plan. During working years, as participants contribute to their 401(k), they can make before-tax contributions which reduces their taxable income, thus reducing the amount paid in taxes. Later, when they reach retirement age and begin to make withdrawals, they may be in a significantly lower tax bracket, resulting in additional tax savings.
Q: Is a 401(k) contribution better than a regular savings account?
A: Typically the funds you invest earn a higher rate of return than a regular savings account because the investments involve larger dollar amounts which can earn higher rates of interest.
Q: How do I select my investment options?
A: You can select to invest your money in one account or divide it by whole percentages (totaling 100%) into several account options. Please refer to separate handouts which describe your Plan's Investment Options.
Q: How do I keep track of my investments?
A: You will receive statements showing your personal contributions, and employer contributions, if any, and the investment earnings on these contributions.
Q: Once I invest my money, can I withdraw it?
A: The 401(k) Plan allows you to withdraw your funds for the following reasons:
termination of employment
disability / death
financial hardship (if allowed by your Plan)
Q: What happens if I leave my job?
A: If you terminate employment you will receive 100% of your contributions and earnings at the specified distribution time. Employer contributions, if any, may be subject to a vesting schedule.
Q: What are the contribution limitations?
A: The Internal Revenue Service sets limits each year on the amount an individual may defer. The Internal Revenue Service also requires testing which assures a fair mix of contributions from participants at all earnings levels. In order to maintain the proper IRS-required balance, it may be necessary to limit the contributions by the higher-paid company employees by adjusting their contributions to a level that is considered appropriate by IRS. If an adjustment is necessary, the affected employees will be notified.