Fielding top-ranked questions about employee 401(k) plans

Believe it or not, we are now halfway through 2014.  I know some of you started 2014 with the resolution to start contributing to your 401k plan or maybe you’re a business owner who wants to offer employees a way to save.  Offering a 401k retirement plan with BCN is an easy and safe option to help assist you and your employees on the path to a secure retirement.

Here are the top questions we regularly receive from owners and employees with regard to a 401k plan:

How much money can I put into my 401(k) account?

The maximum pre-tax contribution dollar amount is set by law and adjusted annually for inflation. The 2014 pre-tax contribution limit is $17,500. If you are age 50 or older you may also make an additional catch-up contribution of $5,500 per year. In addition, there are special non-discrimination rules that apply to the plan. If you earn more than $115,000 a year, or own more than 5 percent of the company, for example, contribution caps may apply for you.

Which is better: Investing pre-tax in a 401(k) plan or after-tax outside of the plan?

The difference between the two types of investments 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 401(k) plan, pre-tax contributions can compound your interest and allow the account to grow quickly.

However, if you need to withdraw money prior to age 59½ you may incur a 10 percent withdrawal penalty in addition to owing current income taxes. After-tax contributions are taxed before they are invested. You are taxed on the growth and earnings in your account as you save.

I would like to transfer an old 401(k) into my new plan. Can this be done?

Yes, this can be done and is referred to as a trustee-to-trustee transfer, or more commonly, a rollover. You need to request a rollover form from and a distribution form from your former employer. There are no penalties with a trustee-to-trustee transfer.

Why are there so many Vanguard Funds in the new plan?

Vanguard is well known for their low-cost funds. Morningstar did a study titled “Fees Matter.” They found that expenses are a better predictor of future returns than past performance. As an investor, there are three elements that you can control in the 401(k) plan: the amount of risk you take (type of investment), the amount you contribute and save, and the fees charged on the funds you select.

The passively managed S&P 500 Index has outperformed 80 percent of actively managed funds over a 20-year period primarily because of the low fees charged. For example, the SSgA S&P 500 Index fund in the typical plan costs only 0.09 percent to own. The Trustee of the plan elected to include many low-cost funds as options for your investments.

Can I withdraw money fwhile I am still working?

Most 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 percent early withdrawal 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

What if I choose to leave my job?

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 directly transferred into an IRA to avoid early withdrawal penalties.

If you would like more information regarding the 401k plan, please contact us here.


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