Who Cares About Retirement Plan Details??
You Should, It’s Your Money
retirement plan language…boring…!!??
In the scheme of things, it’s easy to dismiss retirement plan language because it seems so trivial, insignificant and the financial industry makes it so boring. Would you be more interested in those boring details if those details saved you money?
Well listen up. That boring retirement plan language explains how much of your retirement money you get to keep and how much someone else takes from you. Here’s a simplified break down of how you can keep your money.
Urgent Detail #1 – Vesting|Ownership
Retirement plan investing refers to your personal ownership of money in your retirement account. You will always be 100% vested in or have access to your personal contributions, rollovers and any earnings accrued on that money.
You are not 100% vested in the money your employer contributes to your retirement plan from a match. Your employer sets up a schedule that tells you when you are vested or have access to the money that they contribute to your retirement plan.
Some employers are very generous with their vesting schedules, others are stingy. Based on the Pension Protection Act of 2006, at a minimum, employers are required to follow one of two types of vesting schedules.
1) – A Graded Schedule
If you complete 1 year of service with your employer, you are 0% vested in the employer’s contributions to your retirement plan.
- After 3 years of service – 20% vested, so you get to keep 20% of the employers contribution.
- After 4 years of service – 40% vested.
- After 5 years – 60% vested.
- After 6 years – 80% vested.
2) – A Cliff Schedule
- You hold off being vested at all then you become vested all at once.
- One to five years of service – 0% vested.
- Once you have completed 5 years of service you become 100% vested.
So if you are waffling about staying with your current employer or switching jobs, you may want to review the vesting schedules first.
Urgent Detail #2 – Matching|You Get A Raise
If someone handed you free money, you would take it, right? Did you know that you may be refusing free money from your employer? Your employer is offering you a raise and you aren’t taking it.
When your employer offers to match your retirement plan contributions they are offering you free money. If you are not contributing or maxing out your contributions, you’re turning down that free money.
Employer matching is like getting a raise. The value of your retirement investments will grow faster when you take advantage of your employers matching of your contributions.
Urgent Detail #3 – Withdrawals|Restricted!!
Your retirement plan serves one purpose, to financially prepare you for retirement. This is why the government puts restrictions on allowing you access to your retirement money before retirement age.
You can access your money at any time if you want to pay taxes and penalties on the money. If you are under age 59 1/2 you can avoid penalties by making a hardship withdrawal. This type of withdrawal can only be made penalty free for the following reasons:
- Purchase of a principal residence.
- College tuition
- Certain medical expenses
- Funeral expenses
- To prevent eviction or foreclosure from your principal residence.
Hardship withdrawals are not loans; which is why they are penalty free. However you will owe taxes on the amount of your withdrawal in the tax year of the withdrawal.