Investor Column | Everything you might need to know about your 401(k) retirement account
Retirement plans established under Section 401(k) of the Internal Revenue Code have become one of the most popular types of employer-sponsored company plans. The following is a brief summary of a complex topic, and important details may be left out. Ask until your questions are answered.
A 401(k) plan is an employer-sponsored retirement savings plan. Once you are eligible to enroll, you contribute by payroll deductions. Your money is sent to the custodian of the plan who has an account in your name with beneficiaries you have named.
Some plans provide for automatic enrollment once you’ve satisfied the plan’s eligibility requirements. For example, the plan might enroll you at a 3% pre-tax contribution rate. You can choose a different contribution rate or choose to opt-out if you like.
It is generally your responsibility to direct the investments in your plan. That means you choose, monitor, and change the investments you feel are most suited for your retirement objectives.
Most company-sponsored retirement plans allow for a Traditional 401(k). Some allow for contribution to a Roth 401(k). They are quite different, and both deserve consideration. They each have their own rules.
In the pre-tax Traditional 401(k) plan, your contributions are deducted from your pay and transferred to the plan’s custodian before Federal (and some states) income taxes are calculated. This is a tax-deferred 401(k) plan.
For example, an employee earns $50,000 annually and contributes 10%, or $5,000, to the Traditional 401(k) on a pre-tax basis. The taxable income is now only $45,000. Taxes on the 401(k) are deferred, but will be paid later.
In the after-tax Roth 401(k) plan, you make after-tax contributions into a Roth 401(k) plan.
For example, an employee earns $50,000 and after taxes is left with $40,000. A contribution of 10%, or $4,000, to the Roth 401(k) is on an after-tax basis and any investment gain grows tax free.
In 1993, I installed a Traditional 401(k) plan for a company, and spent time at their facility talking to their workers. One person in particular seemed not interested. I suggested he did not belong in the plan.
I said that I am in a Traditional 401(k) plan and putting money away for retirement. You are choosing not to put money away.
In the future, I might go to a burger place because I have retirement money to spend. You may be behind the counter flipping that burger because you have chosen not to put money away for your retirement.
He yanked the paperwork from my hands and signed up. He is probably happy he decided to enroll.
The company’s custodian provides a menu of investment options, such as a family of mutual funds. There may be other options. From the available investments, you choose those most suitable for your retirement objectives.
Your account at the custodian usually has on-line access. Since the staff is usually not financial advisors, expect little personal advice about the many investment options available. The custodian usually sends paperwork for your reading.
The on-line access may be used for reviewing how your assets are allocated and their approximate values. This allows for you to change those assets within the menu of investment options available.
There may be certain circumstances regarding the company’s plan to consider. For instance, you might rollover to the company plan other assets from other 401(k) or retirement plans you have.
You may be able to make a withdrawal from the plan under certain plan provisions. One frequent provision is for the first-time purchase of a home.
But things can happen. An employee may retire, be terminated, leave the company, or the company closes. You would then contact the company’s custodian to rollover many retirement plans into an IRA or Roth IRA at an investment firm.
Other options you may have include keeping your money in the existing plan, rolling over to a 401(K) at a new employer, or taking a distribution that would likely be taxed and penalized. Once there, work with the financial planner.
Rollovers can be complicated and are usually not a taxable event. It is best to work with a financial planner who has experience in this field.
Your company may not provide any type of retirement plan. If you have your own company, there are many types of plans available. Work with your tax advisor and financial planner to determine what may be best for you.
These many retirement plans are sometimes called a forced-savings plans. They force you to put money away for retirement by payroll deductions. Without being forced means you are forgoing certain pleasures in exchange for retirement security.
The money is “out of sight, out of mind,” but it will be there at retirement.
Consider that retirement might be 30 years or more of unemployment. Put money away today for tomorrow.
Jim Zientara is a Financial Planner with Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. He can be reached at 941-750-6818 or at www.raymondjames.com/jz with office at 11009 Gatewood Drive, Suite 101, Lakewood Ranch 4211. Any opinions are those of Jim Zientara and not necessarily those of Raymond James. This material is being provided for information purposes only, and is not a complete description, nor is it specific investment advice. Consult a financial advisor about your unique situation. Raymond James Financial Services and its advisors do not provide advice on legal issues or tax matters.401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.