10 Most Common Questions and Answers About 401K Plans
Since its inception in 1978, the employer-sponsored 401K is not only a huge benefit of your job, it is an important investment into your future. The 401K plan allows taxpayers a tax break on deferred income and is one of the best ways to save for retirement.
1: Who do I talk to at my company about their 401K plan?
Typically, during your onboarding process, the Human Resource Manager or your direct supervisor will talk to you about the 401K plan they offer and how to set it up. Because this information involves confidential information about your payroll, the Human Resource Manager is the best person to direct any questions or concerns to while you are with that employer.
2: How do I know if it will be worth it in the long run?
No matter how much you invest into your plan, any funds that you put into a comprehensive 401K is going to be beneficial to you in the long run. Regardless of how much has been contributed, remember – its free, non-taxable money! When you leave one employer for another, the money you have accrued is still yours. Think of it as a long-term savings account that will be extremely important during retirement when you are on a fixed income.
3: Do most companies match contributions?
Every company has a different tier system for what they contribute into your 401K plan. For example, Costco has a 50 percent match contribution, however they do cap the amount employees can contribute at $500 annually. The most common plan has an employer contributing an average of 4.3% or 50 cents to every dollar you contribute.
It is important to get all the information you can and make sure you understand exactly how much is coming out of your paycheck, how much your employer is contributing and what the penalties are for early withdrawal.
4: Are all 401K plans the same?
Every company has different policies regarding their 401K plans. Minimum time worked, associated fees, contributing amount and other regulations will all be factors with different 401K plans you’ll come across during your working years. Again, always get all the information you can so that you can make the best decisions regarding your long term investment.
5: At what age do I need to begin contributing?
Financial experts recommend that if your company you work for offers a 401K plan, you should start contributing to it as soon as possible, even if you’re in your early 20’s. The earlier you start investing in your future, the better. Unless you start your own business, you will no doubt work for several different companies in your career and hopefully each one will have a different comprehensive 401K.
6: Should I get outside consulting on my company 401K plan?
It never hurts to get professional advice regarding all your personal investments. A financial advisor can give you advice on how much to contribute to your 401K and what to do with your plan if you are planning to leave one employer for another. There is also a plethora of online resources regarding 401K plans.
7: Is there a maximum amount I can contribute?
Limits to how much one can contribute to a 401K is federally mandated and can change annually to track inflation. If you are under 50 years old, the maximum amount you can contribute in one year is $19,500. If you are over 50, the maximum amount you can contribute in one year is $26,000.
8: What should I do with 401K funds from my other jobs?
It’s best to get the advice from an independent consultant that can advise you on what to do with your funds. Things you can do:
- Cash out your funds (fees may apply)
- Leave all the assets in the company’s plan for future withdraw
- Move the assets into a Roth or rollover IRA
- Transfer funds into a savings account or plan with your new employer
9:When can I take out money from my 401K?
You can begin withdrawing funds out of your 401K at age 59 ½ and the SECURE ACT requires one must draw funds by the age of 72.
10: What can happen to my 401K in an economic downturn?
Depending on the type of downturn, different things could happen to your investment. If you don’t lose your job during a recession, experts say to keep contributing to your 401K plan. In the unfortunate event that you get furloughed or lose your job, talk to an advisor on what to do with your investment. There are several ways to protect your investment during uncertain times.