Are you starting a new full-time job? Congratulations! If your company offers you a 401 (k) plan, you may have to make some important decisions. If you don’t know the answers to these 10 questions, check your plan documents. Or ask your Human Resources representative or plan administrator. Taking some smart steps today can help set you on track towards your retirement goals.
When can I start making contributions?
Not all 401 (k) plans allow new employees to start making contributions immediately. Some companies may make you wait two, three or even 12 months after hiring. Your plan administrator can tell you if a waiting period applies.
Will I be enrolled automatically?
There are more and more companies that enroll their new employees in a 401 (k) plan when they just joined the company. Automatic enrollment is designed to encourage you to save by taking all the effort involved in registering. Ask your Human Resources representative if your company does, because if you are automatically enrolled, you participate in the plan unless you specifically choose not to participate.
Does your company match the contributions of your employees? If so, what are the rules?
Many employers offer incentives for employees to make contributions to their 401 (k) plans by matching contributions to a certain extent. For example, some of them can contribute 50 cents for every dollar the employee contributes to the plan, up to a certain percentage of the employee’s salary. This is a benefit that you will not want to miss. But individual plans vary widely and there may be restrictions to qualify for the matching contribution of the employee’s contribution by the company. Ask the plan administrator for the rules that apply to the company’s plan.
How much can I contribute to my 401 (k) plan?
The IRS sets the limit of contributions each year. In 2019, the amount you can contribute is up to $ 19,000 ($ 25,000 if you turn 50 or older at any time during the calendar year), as long as your contribution does not exceed your income for the year. (Employer contributions do not count toward the limit set by the IRS). You can keep up to date on the limits of your contributions on irs.gov (only offered in English).
Can I sign up for automatic increases to my contributions?
One of the easiest ways to contribute more is to make the process automatic. As your salary increases, you can increase contributions to your 401 (k) plan accordingly. Some 401 (k) plans allow you to specify automatic increases to your contributions even if your salary does not increase, and some employers automatically enroll their employees in plans with automatic increases. Ask your plan administrator if your plan offers automatic increases so you are prepared for them.
What investment options does the plan offer?
401 (k) plans offer investment options chosen by the plan administrator. Having options allows you to find the investments that make sense to you. However, remember that investments carry different levels of risk, including possible loss of capital, and no guarantee of return, so you may want to get advice from a professional.
Is there a Roth 401 (k) option?
Some plans allow the employee to make contributions to both a traditional plan and a Roth 401 (k). The traditional 401 (k) plan offers employees a tax discount now by allowing them to make their money contributions before withholding taxes. But taxes are paid when the money is withdrawn. The Roth 401 (k) works the other way around: you usually make your contributions with money after taxes but you don’t have to pay federal taxes when you withdraw money during retirement. Putting some contributions in a Roth 401 (k) can benefit you if you expect to have a higher level of tax in retirement. A tax professional can help you solve it.
What are the costs and maintenance charges?
Most 401 (k) plans have certain costs and expenses, which may vary and may reduce their overall performance. Some charges cover administrative costs related to the management of the plan. Others cover the cost of managing the specific investment instruments that you choose.
What happens if I withdraw the money prematurely?
Under IRS rules, usually when you withdraw money from your 401 (k) plan before you reach the age of 59½, you have to pay income taxes, plus an additional 10 percent in taxes. [There are some exceptions; see the IRS website (only offered in English) for details]. But some of the plans allow you to get a loan against your account. These plans often carry charges and, as with any loan, you have to pay interest, although in this case, you are usually paying them yourself. You do not have to pay the additional tax for premature withdrawal if you pay the loan within the designated term.
What happens to my money if I leave the company?
Some employers allow you to leave your money in your 401 (k) plan after you leave your job. Others, however, require that the funds be taken with them when leaving. You may be able to make a direct transfer to an individual retirement account (IRA) or the plan sponsored by your new employer. Or you can withdraw the money through distribution, although a penalty may apply. Knowing the rules helps you avoid surprises and develop the best plan. Each of the options can offer different investment options and services, charges, expenses, and rules. These are complex decisions, so take the time to compare the options.