Thinking About 401(k)s

According to a new study measuring how successful Americans will be in retirement, people who have a 401(k) are likely to be reasonably comfortable. Social Security and 401(k) savings will give most people 60% of their inflation-adjusted pre-retirement annual income according to the analysis by the nonpartisan Employee Benefit Research Institute (EBRI).

About 73% of workers with access to 401(k) plans participate in them, according to EBRI.

Here are some things to remember about employer plans:

·         Some plans require anywhere from three months to a year of employment before contributions can begin.

·         The most common 401(k) match is 50 cents for each dollar contributed up to 6 % of pay, but only 23 % of employers provided this exact match formula. The median 401(k) match offered by employers is 3% of pay, and half of employers require workers to save 6 % of pay to capture the entire match.

·         Even after your employer makes a contribution to your 401(k) account, you don't get to keep it until you are vested in the retirement plan. Fewer than half of plans immediately vest all 401(k) participants. Some employers don't allow workers to keep any of the 401(k) match until they have been with the company for a specific number of years.

·         The contribution limit for 401(k)s, 403(b)s, and the federal government's Thrift Savings Plan is $17,000. Workers age 50 and older can also make catch-up contributions worth up to $5,500.

·         Roth 401(k)s allow employees to contribute after-tax dollars to a 401(k) plan. Distributions in retirement, including growth in the account, are tax-free. In contrast, traditional 401(k) plans give you a tax break in the year you make a contribution, but income tax is due when you withdraw the money. Investing in both types of accounts can add tax diversification to your portfolio, which gives you additional flexibility in retirement.It's important to pick a mix of equities and bonds that suits your risk tolerance. At least once a year, review your 401(k).

·         Every time you change jobs, you need to decide what to do with your old 401(k) plan. You can leave the money with your former employer or roll it over to an IRA or your new employer's retirement plan. If you decide to move your money, ask your financial institution to directly deposit the money in the new account you select. This allows you to avoid having 20 % withheld for income tax.

·         Retirees who leave their job during the calendar year they turn 55 or later can take 401(k) withdrawals without having to pay the 10 % early withdrawal penalty.

·         Withdrawals from 401(k)s become required after age 70½. The first required minimum distribution is due by April 1 of the year after you turn 70½, and subsequent withdrawals must be taken by December 31 each year. The penalty for failing to withdraw the correct amount is a 50 % excise tax on the amount that should have been distributed.

Four-in-ten American workers do not have access to 401(k) plans through their jobs. In his recent State of the Union Address, President Obama proposed a plan for the Treasury Department to create “myRA” accounts that would allow people to invest in government savings bonds that guarantee “a decent return with no risk of losing what you put in.” The President also proposed automatic IRAs that would allow a portion of savings to automatically flow into accounts rather than go to workers.  Both plans will require Congressional approval.

 

Some Resources:

http://www.ebri.org/pdf/PR1058.RetAdqcy.22Jan14.pdf 

 

http://money.usnews.com/money/retirement/articles/2012/07/16/10-things-you-should-know-about-your-401k-plan

 

http://www.usatoday.com/story/news/politics/2014/01/28/obama-state-of-the-union-myra-savings-plan/4992743/