5 Common Questions about 401(k) Retirement Plans

Published on Author Manny LarcherLeave a comment

In 1978, a new employer-sponsored retirement plan began in America, and it has since blossomed into the most popular option. A 401(k) plan allows employees to choose between taking compensation in cash or deferring a percentage of it to a 401(k) account under the plan. There are now millions of workers who depend on the money they have saved in this plan to provide for their retirement years. The tax and savings advantages continue to draw more people to invest in this retirement plan. How does it work? Investors who qualify contribute a small percentage of their paycheck before any tax deductions, saving them money on taxes later while putting money away for retirement now. Employers will match a portion of the investor’s contributions, in some cases 5% or higher. We put together five common questions about 401(k) plans:

 

1) How much do I need for retirement?

Retirement is something that many people look forward to, however, it is essential to plan to meet your goals. Understanding how much you need to have saved for retirement is vital. The amount of money that you need to retire comfortably depends on your situation, which is why it is crucial to start early. If you have student loans, consider options like student loan refinancing to reduce your interest rates or become debt free faster. Credit card debt? Consider a more aggressive repayment plan to reduce the amount of money that you pay on interest in the long run.

The “4 percent rule,” a theory which was first introduced by financial planner Bill Bengen in 1994, is a rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. Essentially meaning that one should only withdraw 4 percent of their nest egg in year one of retirement, this rule aims to provide a constant flow of funds to the retiree. Twenty-four years later, the 4 percent rule has now almost become the standard, often recommended, as well as receiving mentions in popular media outlets such as forbes and time to name a few.

As an investor, you’ll need to consider contribution limits, as well as employee benefits. It’s important to note that for 2017, the maximum amount of compensation that an employee can defer to a 401(k) plan is $18,000. The maximum allowable employer/employee joint contribution limit remains at $53,000 for 2016 and $54,000 for 2017 (or $59,000 for those aged 50 and older). You can learn more on IRS.gov.

 

2) What makes a good 401(k) plan?

Some plans vary, making it extremely important to be sure you’re investing in the right one. Some features that help make up a beneficial plan are the following:

  • Provided investment advice
  • 10 or more available investment options
  • Available internet access to make changes, and check balance
  • No yearly contribution restrictions
  • Low expenses

 

3) Can I borrow money from my 401(k)?

Luckily, most 401(k) plans have the option for you to take a loan or borrow from it if need be. For example, if you’re a first-time home buyer, you can take money out of your 401(k) to purchase your home. Student loans, transportation costs, or medical expenses are also some of the reasons investors may decide to borrow from their 401(k). It is essential to understand and be aware of any penalties or fees associated with this. To learn more about your policy you can contact your employer or visit this FAQs page from the IRS.

 

4) Will a 401(k) loan appear on my credit report?  

While applying for a mortgage, lenders may ask about said loans, but they do not appear on your credit report. Any loan borrowed through a 401(k) plan is not reported to credit agencies. Not every 401(k) plan offers a loan option, but the ones that do allow 50% of your vested account to be borrowed with a five-year payback period.

 

5) How to locate an old 401(k) plan from a former employer

Once an investor has contributed money into their 401(k) plan it’s immediately protected by federal laws; unfortunately, it’s not always easy to locate. A few steps that will make your search process more successful are the following:

 

  • Contact past employers and request that they check old records  
  • Research any possible “missing participant” information through The National Registry
  • You should also check the U.S Department of Labor’s Abandoned Plan Database for information on potential plan termination.

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