Common 401(k) Questions from Employees
What are some common questions employees ask about their 401(k)?
CUI Wealth Management is a financial services company that caters to clients across various states and industries. Despite the diversity in demographics, every employee tends to have some common questions regarding their 401(k) plans. Whether it's about investment options, contribution limits, or other related concerns, CUI Wealth Management aims to provide reliable guidance and support to its clients.
Can I set up my own personal 401(k)?
Many people wonder about setting up their personal 401(k) and often get confused about the difference between IRAs and 401(k)s. It is important to note that 401(k) plan contributions must be paid through payroll.
On the other hand, IRAs are individual retirement accounts that anyone can set up, even if their company does not offer a 401(k) plan.
How do I take money out of my 401(k)?
Employees must comprehend that their 401(k) account is specifically designed for retirement savings. Unfortunately, some employees often mistake their 401(k) for a savings account and are unaware of possible tax implications and penalties if they withdraw funds early.
Therefore, it is essential to understand the common scenarios where individuals can access their 401(k) funds without any penalty or tax implications.
Loans
If an employee's 401(k) plan permits loans, they can withdraw money without incurring any early withdrawal penalties. However, employees must understand that they must repay the loan over several years.
Additionally, employees must know that an interest rate will be charged against their loan balance. While this option may help employees avoid adverse outcomes from unexpected life events, it is not a decision that should be taken lightly.
They should know that every time they take a loan from their 401(k), it reduces their overall savings and retirement preparedness and may set them back. Therefore, employees should carefully weigh the pros and cons of a 401(k) loan and make an informed decision after considering all the factors involved.
Hardship Exemptions
It's worth noting that some 401(k) plans come with hardship exemptions that can allow you to access funds early without incurring any tax penalty. However, it's essential to understand that these exemptions are only available in limited situations.
For instance, if you're expecting or adopting, you may qualify for a hardship exemption, allowing you to withdraw up to $5,000 from your 401(k) account without a tax penalty. It's crucial to note that this exemption applies to each employee individually, not as a collective total. That means that if both spouses work for companies that offer the same exemption, they can withdraw up to $10,000 to cover the expenses related to having a baby or adopting a child.
It's worth noting that there are other types of hardship exemptions that individuals might be eligible for, such as:
Medical expenses.
Costs related to primary residence.
Tuition-related expenses.
Payments to prevent evictions.
Funeral expenses.
You can visit the IRS website, where you'll find a comprehensive list of all the options.
It's important to remember that even if the IRS allows for these exemptions in a retirement plan, your plan may still need to adopt them. Every retirement plan is different, and some employers may not enable their employees to take hardship exemptions.
As an employer, it's crucial to understand your documents, especially your adoption agreement. If you're an employee, it's vital to review your summary plan description carefully to see which hardships your employer allows.
In-Service Distributions
Inservice distributions are a popular feature in 401(k) plans that allow employees to withdraw funds from their 401(k) account while employed. It gives employees the option to access their retirement savings while employed.
However, it's important to note that not all 401(k) plans offer in-service distributions, and those may have specific rules and limitations. For instance, some 401(k) plans may only allow in-service distributions for employees at least 59 1/2 years old.
Some 401(k) plans may also charge fees for inservice distributions. These fees can vary widely between plans, so reviewing your plan's documents carefully is crucial to understanding the costs of taking an in-service distribution.
What happens to my 401(k) if I leave my employer?
When you leave your job, what happens to your retirement account and the money you've invested in it depends on the plan your employer has set up. It's important to note that your employer may have limitations on the funds they contributed to the plan. However, any contributions you have made to the plan will always remain yours to take with you.
If your employer has established a vesting schedule, the ability of employees to take funds with them after leaving the company will depend on the duration of their employment. Employers commonly follow different vesting schedules, so understanding which one applies to your plan is essential.
Cliff Vesting
Cliff vesting is a policy by which an employer requires you to remain with the company for a certain number of years to be eligible for any matches they provide. For instance, if your employer follows a three-year cliff vesting schedule, you must complete three years of service with them before you can receive any money they have provided as a match.
Graded Vesting
A graded vesting schedule in a retirement plan lets you keep a portion of the employer match every year you work for the company. For instance, your employer may have a six-year graded vesting schedule, where you are vested for 0% in the first year and then 20% each year for the next five years.
One of the most prevalent misunderstandings regarding vesting is that vesting schedules start based on when you enroll in the 401(k) plan. However, this is not true. Vesting schedules begin based on your original employment date with the company.
If you have been with a company for ten years and the company has a three-year cliff vesting schedule, you would already be 100% vested in anything the employer provides as a match. Understanding your employer's vesting schedule is essential to make informed decisions about your retirement savings.
401(k) Vs Profit Sharing Vesting
It is also essential for you to understand that the employer matching schedule can be different than a profit-sharing vesting schedule. For example, your employer may do a 4% match on the money you put into the plan and have a discretionary profit-sharing contribution. Suppose the employer decides to put a profit-sharing contribution into the plan. In that case, you may be vested in the match but not fully vested in the profit contribution if the vesting schedules differ.
Can I add more money from my bank account to the 401(k)?
It is common for employees to ask if they can make additional contributions from their savings into a 401(k). 401(k) plans do not allow individuals to contribute from their personal savings. Contributions must be made through payroll or by rolling money in from a previous retirement account.
Can I roll a spouse's retirement plan into my 401(k)?
Many employees often wonder if they can transfer their spouse's unrelated retirement accounts into their own 401(k) account. However, retirement accounts are linked to an individual's Social Security number. As a result, it is not possible to transfer funds from your spouse's retirement plan to your own retirement plan.
Why should I put anything into the 401(k) if I have an IRA?
Individuals often have an IRA account for their investments; some prefer it over their 401(k). However, there are trade-offs to consider.
While there is nothing wrong with investing in an IRA, 401(k)s offer the convenience of automatic paycheck deductions and higher contribution limits. In 2024, an individual can contribute up to $23,000 in a 401(k), while an IRA allows a maximum of $6,500. Those aged 50 or over can contribute an additional $7,000 to a 401(k) but only $1,000 to an IRA. Thus, individuals can contribute up to $30,000 in a 401(k) if they are 50 years or older, whereas IRA holders can only contribute a maximum of $7,500 to their retirement account.
If you wish to invest more than $6,500 (if you're under 50) or $7,500 (if you're over 50) in a retirement account, a 401(k) allows for much higher contributions.
IRAs have the advantage of offering flexibility when it comes to investment options. On the other hand, 401(k)s only allow investments that the employer or investment fiduciary provides in the fund menu.
However, 401(k)s may offer a greater choice of investments at a lower entry amount than IRAs. For example, some investments require a minimum of $100 million to enter as a share class in an IRA, while in a 401(k), you can purchase them at a lower entrance requirement or even at any starting price. Additionally, some investment options, such as collective investment trusts, are only available in 401(k)s.
What should I invest in?
It's common for individuals to wonder where they should put their money. When investing in a 401(k), there are several options. Most funds within a retirement plan are mutual funds or Collective Investment trusts (CITs).
Target-Date Funds
One option is to invest in target-date funds, which adjust the asset allocation based on your expected retirement date. These are often the default options in a retirement plan and offer a turnkey approach that adjusts to your age automatically.
Index Funds
Investors who want to minimize fees and diversify portfolios may invest in index funds. These funds track the performance of a specific market index, such as the S&P 500, and are designed to replicate the returns of that index. Because they are passively managed, index funds generally have lower fees than actively managed funds, making them an appealing option for cost-conscious investors.
Managed Accounts
Managed accounts are another option to consider in a retirement plan. In a managed account, the investment manager uses various strategies to maximize returns while minimizing risk. For example, they may choose to allocate the investments across different asset classes, such as stocks, bonds, and cash, or use a combination of active and passive investment strategies.
Managed accounts can offer several benefits to investors, including personalized investment advice, professional investment management, and ongoing monitoring and rebalancing of the portfolio. Also, managed accounts can help investors navigate complex financial markets and achieve long-term investment goals.
However, managed account investments may also come with higher fees than other 401(k) plan investment options. It is essential to consider a managed account's costs and potential benefits before deciding. Consulting with a financial advisor can help determine if a managed account suits your investment portfolio and long-term financial goals.
Risk-Based Funds
Risk-based funds have become a popular 401(k) plan investment option. These funds are designed to help investors manage their investment risk by offering a diversified portfolio aligned with their risk tolerance. Risk-based funds typically invest in a mix of stocks, bonds, and other asset classes, with the allocation of assets determined by the investor's risk tolerance.
The higher the risk tolerance, the greater the allocation to stocks and other high-risk investments. Conversely, the lower the risk tolerance, the greater the allocation to bonds and other low-risk investments. Risk-based funds are an excellent option for investors who want to have a diversified portfolio without making investment decisions on their own.
Conclusion
This is not an exhaustive review of all the questions we receive about 401(k)s, but these are some of the most frequently asked ones. Please get in touch with us if you require further assistance or have questions not answered here. We are 401(k) advisors based in Salt Lake City, Utah, but we have clients in several states. You can find a complete list of the states we serve below.
Along with 401(k) services, we offer financial planning, wealth management services, and investment advice. Schedule a time to meet with one of our financial professionals.