HOW MUCH? - 401K plans

401K rollover, employer’s contributions, borrowing and hardship withdrawal.


Matching contributions.

Unfortunately, this is a slowly disappearing feature of a 401K, which can be a gold mine for those whose employers still mach a percentage of contributions.

For instance, if you put $100 every month into the plan; the company will put in between 10 to even 100 percent of your contribution. Depending on a plan type, employees are usually eligible to receive employer’s matching contributions to their 401K after two or three years of service with the company. Others offer matching contributions for every employee who is eligible to enroll in the plan. Some companies match a larger percentage for people with more seniority and less for new employees.

Leaving the employer.

Depending on your situation, you might have a few options regarding what to do with a 401K when you leave the employer. Note that it is always best to transfer the balance (roll it over) to a 401K with a new employer or an IRA account, because if you cash out you have to pay taxes and penalties.

1. You may be able to leave your money in the plan to grow it further if your balance exceeds $5000, however, you will not be able to contribute more or borrow against it.
2. You can withdraw the money, but you will have to pay regular taxes on the withdrawal, plus a ten percent penalty, unless you are 59 and a half or older.
3. You can have your balance transferred directly to a new employer 401K plan, without having to pay any taxes or penalties, but not all employers allow transfers from old plans.
4. You can roll over the money into Individual Retirement Accounts (IRA). Note that if you later decide that you would like to have it transferred to a 401K with a new employer, it might not be possible.

Borrowing from your 401K.

Not all plans contain loan options, and if they do they usually allow for borrowing only up to half of your balance and for no more than five years. It is literally borrowing from yourself and even interest paid on the loan goes back to your account. Depending on the plan, if you are no longer with your employer, you may have to repay the loan immediately, so it is best to know borrowing requirements in advance.

Hardship withdrawal.

401k Nest Egg
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Many 401K plans allow this type of withdrawal, however, some are subject to a 10% federal tax and a 10% penalty. Some qualifying hardship situations include: buying a first home, expenses of post-secondary education, some medical expenses and trying to avoid a foreclosure\eviction on your residence.

See also: 401k plan, 401K investments, Individual retirement account, interest rates

Related topics: 401K and taxes, 401K guide




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