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401(k) Frequently Asked
Questions
1. How much money can I put into my 401(k) account?
2. What is the difference between investing pre-tax
and after-tax contributions?
3. What pre-tax percentage should I invest when I
am starting out?
4. Is it legal for my employer to move my 401(k) account
balances from my chosen investment funds to similar investment funds
and change investment fund managers?
5. What can I do if I don't like the investment funds
that my company offers?
6. Can I withdraw money from my account while I am
still working?
7. How is my company match determined?
8. Can I stop contributing if I feel I can't afford
to?
9. What happens to my 401(k) account balances if I
choose to leave or am fired from the company?
10. How long can my former company hold my account
balance from my date of termination?
11. What information and reports is my employer required
to provide me with on my 401(k) plan?
12. How soon does my employer have to deposit my
contributions deducted from my pay into my 401(k) account?
13. I still have a 401(k) account with my former
employer. I would like to transfer this account into my IRA. Can
this be done? If so, are there any penalties?
14. What are the rules regarding hardship withdrawals
from my 401(k)?
15. What are the general rules regarding loans from
a 401(k)?
16. I am currently working in the U.S. on a Visa.
If I choose to leave the U.S. when my Visa expires, what will happen
with my 401(k) account?
401(k) frequently asked questions
1. How much money can I put into my 401(k) account?
The maximum pre-tax contribution dollar amount is set by law and
adjusted for inflation annually. The 2007 pre-tax contribution limit
is $15,500. If you are age 50 or older you may also make an additional
catch-up contribution of $5,000 per year. Some plans may offer you
the option to contribute on an after-tax basis which is not included
in the $15,500 limit. Note that plans may restrict employee contributions
to an amount less than $15,500, and may also choose not to permit
catch-up contributions.
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2. What is the difference between investing
pre-tax and after-tax contributions?
The difference between the two types of contributions is when you
are taxed. Pre-tax contributions and earnings are taxed only when
you withdraw it. Since the money that would normally be paid in
taxes goes directly into the plan, pre-tax contributions can accumulate
quickly. However, if you need to withdraw money prior to age 59½
you may incur a 10% withdrawal penalty, in addition to owing current
income taxes. After-tax contributions are taxed before they are
put into the plan. Although you won't owe taxes on your contributions
when you take a withdrawal, you will be taxed on the earnings and
may be subject to an early withdrawal penalty on the interest earned
if you do so before age 59½.
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3. What pre-tax percentage should I invest when
I am starting out?
Any savings is better than nothing and the sooner you get started,
the better!! You should maximize your company's match. For example,
if your company matches 50 cents on the dollar up to 6%, you should
contribute at least 6%. Simply defer as much as you can afford to
budget and take full advantage of the tax deferral.
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4. Is it legal for my employer to move my 401(k)
account balances to similar investment funds and change investment
fund managers?
It is legal. It is your company's responsibility to provide competitively
performing funds.
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5. What can I do if I don't like the investment
funds that my company offers?
Talk to your human resources representative. Your employer has implemented
a retirement savings plan for the employees to utilize and appreciate.
It is your employer's fiduciary responsibility to provide competitively
performing funds.
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6. Can I withdraw money from my account while
I am still working?
Some plans offer loans allowing you to borrow money from your 401(k)
account, but you have to pay yourself back with interest. If you
fail to pay back the loan it is treated as a withdrawal and the
outstanding loan balance will be subject to current income taxes
as well as a 10% early withdraw penalty. If your plan doesn't offer
loans, you may be able to qualify for a severe financial hardship
withdrawal if no other resources are available to you. According
to the IRS a hardship withdrawal includes the following:
- down payment of primary residence
- college tuition for you or your dependents
- unreimbursed medical expenses
- prevent eviction or foreclosure from your home
Some companies are more lenient than others. Because of the complexity
surrounding this issue and varying plan designs, you need to reference
your plan document or ask your Human Resources representative for
further information regarding plan withdrawals
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7. How is my company match determined?
There are several different methods used to determine the amount
your company may contribute to the plan. Some of the more common
employee matches include:
- fixed percentage - company contributes 25% up to 6% participant
deferral
- guaranteed percentage - company contributes a pre-determined
percentage of participants' pay
- discretionary percentage - company contributes a percentage
of participants' pay generally based on company profits and subject
to change year to year.
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8. Can I stop contributing if I feel I can't
afford to?
Most plans allow you to stop contributing at any time though employers
are not required by law to do so. Some plans may require specific
percentage contribution for a full plan year so be sure to check
your plan rules.
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9. What happens to my 401(k) account balances
if I choose to leave or am fired from the company?
Your distribution options are the same whether you voluntarily leave
or are terminated. If your account balance is more than $5,000,
you can leave your money in the plan. If you want to take your money
with you, your vested account balance can be rolled into another
401(k) plan with your employer or put into an IRA to avoid early
withdrawal penalties.
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10. How long can my former company hold my
account balance from my date of termination?
There is no quick, general answer. There are four factors that affect
the timing of your distribution:
a) The plan itself may
provide a time frame which should be documented in your plan documentation
or summary plan description. In some rare cases, distributions are
not made until the participant has reached retirement age, usually
defined as age 65, even if the participant terminated employment
much earlier.
b) Your distribution cannot be
processed until after the next valuation date when the plan
determines the account balances of participants. Companies can determine
account balances daily, monthly, quarterly, semiannually or even
annually.
c) How your money is invested
can affect how long it will take for you to get your distribution.
While most investments can be liquidated quickly, a few, such as
some real estate investments, may take longer.
d) Processing your paperwork
after the valuation date can take a few days or a few weeks depending
on how your plan is managed.
It is important for you to know that your company wants you to have
your money just as soon as you do. The company is responsible for
and must pay fees on your account balance for as long as your money
remains in the plan.
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11. What information and reports is my employer
required to provide me with on my 401(k) plan?
Your employer must provide you with a Summary Plan Description and
an annual statement of your account information. You have a legal
right to ask the plan administrator for a copy of the plan's latest
Form 5500 or Form 5500-C/R, the summary plan description, the plan
document, the trust agreement setting up the plan, if separate from
the plan, and any collective bargaining contract, if appropriate,
and any other instrument under which the plan was established or
is operated. In addition, you will often be provided a prospectus
for every fund offered in the plan, but this is not legally required.
If your company's stock is offered in the plan you are required
to receive a prospectus on the company stock fund.
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12. How soon does my employer have to deposit
my contributions deducted from my pay into my 401(k) account?
Government regulations require that participant contributions to
a 401(k) be deposited to the plan on the earliest date that they
can be reasonably segregated from the employer's general assets,
but in no event may they be deposited later than the 15th business
day of the month following the month in which the participant contributions
are deducted from their pay. Please note that your employer can
not wait until the 15th business day of the month following the
month in which your contribution was deducted just for the convenience
of doing so. If they can deposit the funds sooner, they must do
so.
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13. I still have a 401(k) account with my former
employer. I would like to transfer this account into my IRA. Can
this be done? If so, are there any penalties?
Yes, this can be done and is referred to as a trustee to trustee
transfer. You need to request the distribution forms from your former
employer. Make sure you open your new IRA before the transfer so
that you can provide the account information on the required forms.
There are no penalties with a trustee to trustee transfer, but if
you allow your former employer to send the funds directly to you
and not to your new IRA, they will be required to deduct and remit
20% of the total to the IRS.
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14. What are the rules regarding hardship withdrawals
from my 401(k)?
Hardship withdrawals are allowed by law but your employer is not
required to provide this option in your plan. The cost of administering
such a program can be prohibitive for many small companies. Your
summary plan description (SPD) will state whether or not your employer
allows withdrawals in your plan.The IRS code that governs 401(k)
plans provides for hardship withdrawals only if: (1) the withdrawal
is due to an immediate and heavy financial need; (2) the withdrawal
must be necessary to satisfy that need (i.e. you have no other funds
or way to meet the need); (3) the withdrawal must not exceed the
amount needed by you; (4) you must have first obtained all distribution
or nontaxable loans available under the 401k plan; and (5) you can’t
contribute to the 401(k) plan for 6 months following the withdrawal.The
following four items are considered by the IRS as acceptable reasons
for a hardship withdrawal:
- Un-reimbursed medical expenses for you, your spouse, or dependents.
- Purchase of an employee’s principal residence.
- Payment of college tuition and related educational costs such
as room and board for the next 12 months for you, your spouse,
dependents, or children who are no longer dependents.
- Payments necessary to prevent eviction of you from your home,
or foreclosure on the mortgage of your principal residence.
Hardship withdrawals are subject to income tax and, if you are
not at least 59½ years of age, the 10% withdrawal penalty.
You do not have to pay the withdrawal amount back.
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15. What are the general rules regarding loans
from a 401(k)?
The rules governing 401(k) plans allow plans to provide loans, but
do not mandate that an employer make it a plan feature. Your summary
plan description (SPD) will state whether or not your employer allows
loans in your plan.Most of the time loans are only allowed for the
following reasons: (1) to pay education expenses for yourself, spouse,
or child; (2) to prevent eviction from your home; (3) to pay un-reimbursed
medical expenses; or (4) to buy a first-time residence. You must
pay the loan back within five years, although this can be extended
for the first-time home purchase.Usually you are allowed to borrow
up to 50% of your vested account balance to a maximum of $50,000
(set by law). Because of the cost, many plans will also set a minimum
amount and restrict the number of loans you can have outstanding
at any one time. Loan payments will generally be deducted from your
payroll checks and, if married, you may need your spouse to consent
to the loan. Funds obtained from a loan are not subject to income
tax or the 10% early withdrawal penalty. If you should terminate
your employment, often any unpaid loan will be distributed to you.
This distribution will be subject to income tax and, if you are
not at least 59½ years of age, the 10% withdrawal penalty.
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16. I am currently working in the U.S. on a
Visa. If I choose to leave the U.S. when my Visa expires, what will
happen with my 401(k) account?
To avoid early withdrawal penalties and payment of taxes you can
doone of two things: (1) If your account balance is over $5,000,
you can leave your 401(k) money in your former employer’s plan.
(2) You can roll your account balance into an IRA. You can also
request a distribution from the 401(k) plan and take the lump-sum
payment. You will have to pay taxes and early withdrawal penalties
with the lump sum payment.
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PSCA is not engaged in rendering legal advice. We are providing
you with general 401(k) information. For plan specific information,
you need to refer to your employer's summary plan description.
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