Q: Do most 401(k) plans allow me to invest in individual stocks?
A: Most 401(k) plans do not offer the option of investing in individual stocks. Rather, they offer stock mutual funds. Some 401(k) plans offered by publicly traded companies do, however, offer the company's stock as an option.
Q: Can the government change the tax rate on 401(k) plans in the future?
A: Yes. Congress can change the rate at which 401(k) distributions are taxed in the future.
Q: When a 401(k) is down, is it a good idea to keep funding it?
A: It's usually better to reallocate your contributions rather than stopping them altogether. Not only is the money you contribute to your 401(k) tax-deferred, any matching contribution made by your employer is "free money."
Q: What is the maximum yearly contribution I can make to a 401(k)?
A: If you participate in a traditional or safe harbor 401(k) plan and are under the age of 50, you can contribute up to $16,500 in 2010 and in 2011. If you are age 50 or older, you can contribute an additional $5,500 in 2010 and in 2011. If you participate in a Simple 401(k) plan and are under the age of 50, you can contribute up to $11,500 in 2010 and in 2011. If you are age 50 or older, you can contribute an additional $2,500 in 2010 and in 2011.
Q: Should I stop contributing to my 401(k) and use that money to pay off debt?
A: At the very least, you should contribute the amount that allows you to maximize your employer's matching contribution. In other words, if your employer provides a 100% match on your contributions up to 6% of your salary, you should contribute 6% of your salary.
Q: Can I access my 401(k) for funds if I'm fired from my job?
A: Yes. However, if you do not roll those funds over into another tax-qualified account within 60 days, you will be subject to an early distribution penalty of 10%. In addition, the distribution will be taxed at ordinary income rates.
Q: Are contributions to a 401(k) prorated from the time I start work?
A: No. For tax years 2010 and 2011 you are allowed to contribute the maximum amount (see question 4) allowed by law regardless of the date you started.
Q: How is 401(k) loan interest compounded?
A: The interest rate on 401(k) loans is the prime rate plus 1%.
Q: Can I have an IRA and 401(k) plan at the same time?
A: Yes. However, if you participate in an employer-sponsored 401(k) plan, the money you put into a traditional IRA may not be tax deductible.
Q: Is there any advantage to rolling my 401(k) into a rollover IRA instead of my existing traditional IRA?
A: If you plan on placing your rollover 401(k) funds into a new employer's 401(k) plan, then it's best to keep your rollover 401(k) rollover account separate from your traditional IRA account.
Q: How much will my 401(k) be taxed when I liquidate it?
A: If you liquidate your 401(k) and roll the entire amount into another qualified plan within 60 days, you will not be taxed.
Q: How long does it take to release a 401(k)?
A: While it varies from company to company, it typically takes between two and four weeks to receive your money.
Q: Can I cash out my 401(k) tax free to pay medical bills?
A: If your employer's plan allows it, you can take a "hardship" withdrawal to pay your medical bills. If you are under the age of 59 ½ and the medical debt exceeds 7.5% of your adjusted gross income, you will be responsible for paying tax on the distribution but you will not incur the 10% penalty.
Q: Can I withdraw from my 401(k) without penalty to fund my college tuition?
A: If you are younger than age 59 ½, you will be required to pay income tax and the 10% early withdrawal penalty on the distribution.
Q: Can I use my 401(k) to pay for surgery to stop a life threatening illness?
A: Yes. However, you will be responsible for paying income tax and the 10% penalty on the distribution if you are younger than 59 ½.
Q: How old must I be to enroll in a 401(k)?
A: You must be at least 21 years old.
Q: Should I borrow against my 401(k) to pay off high-interest credit cards?
A: Depending on the amount of debt, the interest rate and your job security, it is sometimes a good idea to borrow against your 401(k) to pay off high-interest credit card debt.
Q: What percentage of my paycheck should I contribute to my 401(k)?
A: If you cannot afford to contribute the maximum amount, you should at least contribute the amount that allows you to maximize your employer's matching contribution. In other words, if your employer provides a 100% match on your contributions up to 6% of your salary, you should contribute 6% of your salary.
Q: What am I supposed to do with my 401(k) after I leave my employer?
A: You can leave your 401(k) in your previous employer's plan, you can roll it over into your new employer's plan, or you can roll it over into another tax-qualified account.
Q: How can I request a 401(k) rollover from a very old employer?
A: Ask the employer to provide you with the necessary forms to request a 401(k) rollover. You can also ask the new custodian to contact your previous employer on your behalf.
Q: How does a 401(k) work behind the scenes?
A: After you've chosen the types of investments that are best suited to your retirement savings goals, the plan administrator manages the funds, tracks your contributions, and prepares quarterly statements on your behalf.
Q: Is there a waiting period to take out multiple 401(k) loans?
A: There is no waiting period between 401(k) loans.
Q: Should I take a slightly higher-paying job that doesn't offer a 401(k) plan over one does?
A: You should take the job you'll be happiest in and enjoy the most. This will provide you and your family with greater economic stability in the long run.
Q: Should I report my 401(k) interest income on my tax return?
A: No. The interest you earn on your 401(k) investments is not taxable.
Q: How much will I owe in taxes on an inherited 401(k) plan?
A: If you're the spouse of the deceased, you will not owe taxes on the 401(k). If you are a non-spouse beneficiary, you will be able to deposit the inherited 401(k) into your own IRA and take distributions based on your life expectancy. The taxes owed will be based on your ordinary income amount each year.
Q: What are the pros and cons of withdrawing from my 401(k) to add to my down payment for a home?
A: One benefit of borrowing money from your 401(k) is that it can be less expensive than borrowing money from other sources. But taking money out of your 401(k) means less money is available to compound, which means you may have less when you retire.
Q: What happens to a 401(k) plan if I pass away before retirement?
A: If you have not named a beneficiary and you are married, your spouse will inherit your 401(k). If you have not named a beneficiary and you are single, your 401(k) will become part of your estate. If you have named a beneficiary, he or she will inherit the account regardless of your marital status.
Q: What happens to my 401(k) if my employer goes bankrupt?
A: Federal ERISA (Employee Retirement Income Security Act) law requires that companies keep employee retirement plan assets separate from business assets. Even if your employer goes bankrupt, your money is protected.
Q: Can I rollover a 401(k) into an IRA without changing jobs?
Q: What is the difference between a 403(b) plan and a 401(k)?
A: 403(b) plans are available to government employees and employees of non-profit organizations. 401(k) plans are available to employees of for-profit companies.
Q: How much does a 401(k) rollover cost?
A: While the new custodian may charge an annual fee to manage your account, there are typically no fees associated with rolling over your 401(k).
Q: What are some alternative savings plans to the 401(k)?
A: Traditional IRAs, Roth IRAs, annuities and even whole life insurance policies can be used to build tax-deferred retirement savings.
Q: Is it better to keep 401(k) accounts separate or roll them into one account?
A: If you're rolling over several 401(k) accounts at the same time, it may be easier to combine them. If you're rolling them into a bank account, money market or Certificate of Deposit, you'll want to make sure that the total amount does not exceed the amount covered by the FDIC (Federal Deposit Insurance Corporation).
Q: Can I participate in two 401(k) plans at the same time?
A: Yes. However, you can still only contribute the maximum amount allowed as outlined in question 4.
Q: Does borrowing from a 401(k) affect my credit score?
A: No. Loans taken from your 401(k) are not reported to the three main credit bureaus.
Q: How long do I have to rollover my 401(k) after I leave my job?
A: You must deposit the funds into a tax-qualified account within 60 days.
Navigating the murky waters of finance can be tricky. There is far more information than we can cover here. To make sure you're on the right track, contact a licensed financial advisor. It only takes a few minutes, Start Now.
More 401k Guidance
- 401k Investment Guide — The complete guide to 401k investing.
- 401k Rollovers — How to roll over a 401k and avoid taxes.
- 401k Rules and Limits — 401k contribution limits explained.
- 401k Loans — How to take out a 401k loan properly.
- Solo 401ks — How to save money with a Solo 401k if you're self-employed.