Planning for the future is important. One of the most popular ways to do this is through a 401(k).
As a business owner or manager, you will probably get lots of questions about 401(k)s from your employees. We've compiled a list of some of the most common questions that employers get from their employees, complete with answers to help you respond the next time an employee asks you for more information.
Common Employee 401(k) Questions:
What is a 401(k)?
A 401(k) is a retirement savings plan that is authorized by the IRS. Employers can deduct whatever 401(k) contribution amount that you request from your paycheck when they do payroll. Money put into a 401(k) plan is tax-free and can be directed to one of several fund options for investment.
Will you match my contributions?
Some employers offer 401(k) matching contributions where they will contribute a certain amount of money to an employee's 401(k). Often these contributions are a portion of the employee's contribution. For example, an employer may have a policy that they will match your contributions with a 50% contribution. In other cases, they may match your contributions dollar for dollar up to a certain annual amount.
By opening a 401(k) with an employer and receiving extra contributions, you can fast-track your retirement savings. Employer contributions can be a gesture of goodwill to employees and can provide added incentive for employees to remain loyal to a company.
When can I open a 401(k)?
Not every employer will match your 401(k) contributions, but you can open a 401(k) at any time and make your own contributions from your paycheck.
What are my contribution limits?
The contribution limits change from year to year. The 2018 contribution limit is $18,500.00. Contributions must be filed by the end of the calendar year, with the exception of sole proprietorships and LLCs, which have until April 15th.
When can I access my money again?
The purpose of a 401(k) is to help you invest money during your working years so that you will have savings for retirement. You can begin to make withdrawals from your 401(k) once you are at least 59 and one-half years of age. Withdrawals at this stage of your life are penalty-free. However, if you make a withdrawal before you reach this age, you will have to pay a penalty tax of 10%.
If you want to maximize your savings and avoid having to pay steep penalty fees, keep your 401(k) funds invested until you reach the age of withdrawal.
What if I start a new job somewhere else?
If you switch jobs, you can keep your 401(k), although you might need to maintain a minimum balance. Your best option is to roll your old 401(k) over to your new employer. If your previous employer allows for rollovers, you can continue contributing to the same 401(k) through your new employer.
Types of 401(k) Plans:
- Traditional 401(k): Employees make contributions and taxes are deferred.
- Safe Harbor 401(k): Employers make the same percentage of contributions to every employee's 401(k) and do not need to pass an annual nondiscrimination test.
- SIMPLE 401(k): Designed for small businesses with 100 or fewer employees.
- Solo 401(k): A single-participant 401(k) plan for business owners with no employees.
- Roth 401(k): Similar to a traditional 401(k), except taxes are withheld from the employee's gross pay before wages are diverted to their 401(k).
If your business decides to offer 401(k) contributions to its employees, you should make sure that you are well-versed in the rules of 401(k) investing. Because 401(k)s are administered by employers, you will be the first person new employees turn to when they starting thinking about putting away money for their retirement.