Retirement Plans

For answers to some of the most frequently asked questions about retirement plans, please select a question.

What is a 401(k) plan?
A 401(k) plan is a defined contribution plan that is usually offered by corporations. An employee may contribute a portion of his or her salary to a retirement plan account on a pre- and/or after-tax basis. Most 401(k) plans offer a variety of investment vehicles, from mutual funds to money market accounts. Contributions, plus earnings, become a significant part of future retirement income.

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Why should I contribute to a 401(k) plan?
An employer-sponsored retirement plan offers a convenient way to save for retirement by contributing part of a participant's paycheck each pay period. Authorized payroll deductions mean participants don't have to worry about writing a check, remembering to deposit the money, or spending the money before it is deposited into their account. Some employers will make a matching contribution, which will allow you to build up your account more quickly. There are possible tax advantages as well. Please review your Summary Plan Description (SPD) for more information.

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What if I switch jobs?
All of the money contributed to a 401(k) plan and its earnings belong to the participant the moment they enroll in the plan. The employer's contribution, if there is one, may be required to meet vesting requirements. When a participant leaves one employer to go to another, several options may apply, including leaving the money in the former employer's plan, rolling the account balance into the new employer's plan, or rolling into an Individual Retirement Account (IRA). The money may also be taken out in cash, but would be subject to income tax and possibly an early withdrawal penalty.

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Are 401(k) assets taxable?
Unlike salaries, participant contributions are not taxed each year. As a result, more money is available to produce earnings that can help build a nest egg more rapidly. Generally, contributions and earnings are not taxed until they are withdrawn. The authorized contributions are deducted from a participant's gross pay before federal taxes are withheld; in other words, they are pre-tax savings. These pre-tax dollars reduce the participant's taxable income, which may lower income taxes when tax returns are filed.

Your plan may also allow you to make Roth contributions. Roth contributions are after-tax contributions rather than pre-tax contributions as described above. Roth contributions are included in your taxable wages. Pre-tax deferrals plus earnings are taxed as income at withdrawal while Roth contributions plus earnings are free from income tax at withdrawal provided the Roth distribution is "qualified".

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How are contributions invested?
In most 401(k) plans, participants choose how contributions are invested. The selection of investment options available is determined by the employer and may change from time to time. After payroll deductions are authorized, the contribution is automatically deposited into the investments chosen each pay period.

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How do most people set up their investments?
Most retirement plans offer investment options ranging from conservative to moderate to aggressive. Participants determine their risk tolerance, their time horizon to retirement, and their current financial resources when deciding how to pick their investments. They must also keep in mind that there is no guarantee of future results.

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How much can be contributed annually to a 401(k) plan?
Government regulations state the amount that can be contributed to a retirement savings account annually. For 2014, the maximum contribution amount is $17,500, unless the participant is eligible to make a "Catch-Up" contribution. This amount may be limited by plan terms.

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What is a "Catch-Up" contribution?
A "Catch-Up" contribution may be available to participants age 50 or over who have reached their statutory limit (see the question above) or other limit. The 2014 "Catch-Up" contribution limit is an additional $5,500.

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Can I access the money in my account?
Generally, account balances are not available for withdrawal until termination of employment. Depending on the terms of the plan and guidelines set by the IRS, assets may be withdrawn for any of the following reasons: death of a participant, retirement, total and permanent disability, termination of service, age 59 ½, Safe Harbor hardship (as defined by IRS regulations), and loans (subject to setup and maintenance fees).

Each plan comes with a Summary Plan Description for more details and specifics on account withdrawals.

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What are Safe Harbor hardship reasons?
Some plans allow withdrawals for Safe Harbor hardships. Supporting documentation must be submitted to the employer to prove any of the following hardship reasons:

  1. Pay unreimbursed medical expenses for participant or dependent
  2. Pay funeral expenses for deceased parent, spouse, child, or other dependent
  3. Costs related to purchase of primary residence
  4. Amounts needed to prevent eviction from the primary residence or foreclosure on the mortgage of that residence
  5. Pay expenses for repair of damages to primary residence that would qualify for casualty deduction under IRC165
  6. Pay for post-secondary education for participant, spouse, or dependent

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How are early withdrawals reported on my taxes?
Ordinary income taxes will apply to each withdrawal. Withdrawals received prior to age 59 ½ may be assessed a 10% federal income tax penalty as well. To comply with federal regulations, a 1099R will be sent to the IRS to inform them of the taxable and non-taxable portions of the withdrawal. A copy will be sent to the participant by January 31 or the year following the withdrawal so tax filings may be prepared.

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What does "vested" mean?
To be "vested" means that one completely and permanently owns the employer's contributions. There are many schedules which allow participants partial ownership of employer money, usually based on years of service. Please review your Summary Plan Description (SPD) for vesting schedule information.

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What is the difference between investment elections for future contributions and transfers?
When a participant changes his or her investment elections for future contributions, he or she is changing how future contributions will be applied. Changing how current dollars are invested is considered a transfer. Most plans allow current dollars and future dollars to be changed independently.

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Can I deposit money into my 401(k) by writing a check?
Contributions to an employer-sponsored retirement plan can only be made through payroll deductions. However, some plans will allow a participant to roll money from another qualified plan to the participant's current account. Once employment is terminated, contributions cannot be made.

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