With everything going on in your life, you may not think details about your 401k account are that important. Ahhh, but they are. Your financial health depends upon the small, seemingly unimportant details of your 401k account. We have highlighted for you the details that are important to know.
401k Details That Affect Your Financial Health
401k Contribution Limits:
401k contribution limits may change every year to keep up with inflation. Some years do remain the same as prior years. It is best to check with your employer, 401k administrator or tax accountant every year to stay current.
- For 2009, the 401k contribution limit was $16,500 with a catch-up* contribution limit os $5,500.
- For 2010, the contribution limit remained the same as 2009, which was $16,500 with a catch-up* contribution of $5,500.
- For 2011, the 401k contribution limits stayed the same as 2009 and 2010.
Catch-up Contributions*
- Congress added a provision to 401k plans for 401k participants who are over 50 years old. This provision is referred to as catch-up contributions.
- For 2009 and 2010 the catch-up contribution was $5,500.
- For 2011, the catch-up contribution is the same, $5,500.
- The catch-up contribution allows eligible participants to make an additional contribution that exceeds their standard contribution limit. This additional amount is also tax deferred.
- To be eligible, a participant just has to turn age 50 before the end of the calendar year they make the contribution.
- The catch-up contribution is allowed every year forward after someone turns age 50.
Matching:
- FREE MONEY. If your employer matches your personal 401k contributions, you are in effect receiving free money.
- To take full advantage of the free money, you should at least contribute enough to your 401k account to get a full match from your employer.
401k rollovers:
A direct rollover or a trustee-to-trustee transfer is the best way move money from one 401k plan to another.- With a direct rollover or trustee-to trustee transfer your money is directly transferred from one 401k company to the other without you taking possession of it.
- If you take possession of the rollover check and forget to redesposit that check into your new employer’s 401k plan, you may be taxed and incur a tax penalty…this can get expensive.
- The IRS could interpret your “over site” as an early distribution or early withdrawal.
- The IRS considers early distributions and early withdrawals to be a taxable event, depending upon our age.
- The IRS also considers early distributions and early withdrawals an event where you incur a 10% tax penalty.
- To avoid excess taxes and penalties, do not withdraw or take a distribution from your 401k account until age 59 1/2. After age 59 1/2, withdrawals and distributions are not considered to be early, so do not incur extra taxes or penalties.
Vesting:
If your employer matches your 401k contributions, those monies are generally vested and a vesting schedule is created. Sometimes employer’s do not have a vesting period set up within the 401k plan and you can access the money in your account immediately; however this is rare, so check with your employer.
- A vesting schedule only applies to a company match.
- The schedule shows when you can personally have access to the money that was applied to your 401k account as a company match.
- The schedule does not apply to any of your personal 401k contributions.
- Your personal contributions are always 100% vested, which means you have access to them immediately, not based on some vesting schedule.
401k Loans Requirements:
There are only 4 situations in which a 401k loan is allowed by the IRS without incurring extra taxes and penalties. Employers do not always set up their 401k plans to allow for loans. You will have to check with your own employer to see if loan provisions are available in your particular 401k plan.
- College Tuition – to pay for expenses for you, your spouse or your children.
- Home Mortgage – to avoid eviction from your home due to the inability to pay your mortgage.
- Medical Expenses – this is called a hardship loan.
- First Time Home Buyer – this is for the down payment on your first home.
401k Loan Rules:
- Maximum loan percentage you may take: 50% of your vested balance.
- Maximum loan amount: your loan cannot exceed $50,000.
- Length of loan: generally 5 years before repayment is required.
- Repayment: through payroll deductions.
- Non-payment of loan: you will be taxed on any amount of the loan that you do not repay.
- Loan interest rate: 401k plans are required by law to charge a reasonable interest rate for 401k loans.
Small details that are so important. Be aware of the small details of your 401k plan, it could make a big difference in your financial future.
