Read these 10 401k Tips tips to make your life smarter, better, faster and wiser. Each tip is approved by our Editors and created by expert writers so great we call them Gurus. LifeTips is the place to go when you need to know about Retirement Planning tips and hundreds of other topics.
Many people often wonder if they can take money out of their 401k plan. The answer is emphatically, yes. Many 401k plans offer loans, however some 401k plans have limitations on the reasons for the loan. If your 401k plan is through your employer, you will need to contact your human resource department for information regarding your 401k plan and the loan requirements. Typically, you will take a loan out and then repay the money back with interest. You can even continue to accrue money in your 401k plan. Taking out a loan on your 401k plan offers some benefits. For instance, you don't have to worry about your credit rating to qualify for the loan. There may be some restrictions involving payments and the amount of time you have to repay the loan.
Minimum Required Distributions were designed by the IRS to ensure that benefits from 401k plans and other retirement plans are actually used by the employees who paid into them. The age of minimum required distributions is set at 70 ½ years old. However, it is possible that your particular 401k plan has an earlier set age for the minimum required distributions. If you're unsure of the age requirement for your plan, you should ask your financial services provider. In some cases, for those who are older than 70 ½ years old and are still working, and do not own more than five percent of the business they are employed by, they may be able to defer the date of their minimum required distributions until April 1st of the year that follows one year after you retire.
Self-employed workers may benefit from establishing a Solo Self Employed 401k plan. The plan is limited to themselves and their spouses. If one more employee is hired, then the plan must be switched to a “Simple 401k plan.” There are many benefits to having a Solo 401k plan, and greater tax savings is just one of them. They are very easy to establish and do not require the rigorous legalities of other 401k plans. If you previously invested in a 401k plan or other retirement plans, you can consolidate them into your Solo 401k plan. Another great reason to choose a Solo 401k plan is that you can take a tax free, penalty free loan of up to half of your 401k plan.
You're never too young to start retirement planning. Ask your employer what type of 401k plans they have to offer and if they have matching contributions. Your 401k plan is “pre tax” money and not considered your income. It will continue to grow and isn't subject to taxing until you withdraw your funds. There are limits however, as to how much you can defer or put towards your 401k plan.
For 2006, the limit is $15,000. However, if you are over the age of 50, you are given a limit of $20,000. You should make sure that your company is contributing or matching your 401k plan with cash dollars, sometimes they will match your plan with stocks. If you aim for cash in your retirement, then double check with your employer.
You may be able to apply for a loan against your 401k plan. Many people prefer this option because there are no penalty fees or taxes due, depending on the loan's purpose. If your 401k plan will not allow you to take a loan, you may be able to apply for a Hardship Withdrawal. The IRS has determined that the following categories constitute a Hardship Withdrawal:
· Down Payment for a Home
· College Tuition (for self or dependents)
· Unpaid Medical Expenses
· Preventing Evictions or Foreclosures
If you believe that your situation falls into one of these categories, consult with your Human Resources department or your financial services provider. You may be able to withdraw from your 401k plan. Every 401k plan is different and various companies have different rules and regulations.
There are many reasons why you should Rollover your 401k plan. Your 401k plan is tax-free until you withdraw from it. If your company is going out of business, or if you are changing jobs, it is more beneficial to Rollover your 401k plan rather than withdraw it. There are penalty fees to consider and taxes that would have to be paid as soon as you withdraw your 401k plan. A Rollover keeps your tax-free status on your 401k plan. You should consult with a private brokerage firm to discuss your possible Rollover options.
As recent reports tell us, many people in their 40's and 50's haven't accrued enough savings for their retirement. These people should consider investing in their employer's 401k plan as soon as possible. There are limits as to how much you can invest. For the year 2006, the limit is $15,000, but if you are 50 or older the limit is $20,000. Find out if your employer will match your contribution as well. You can also invest in other plans, such as Mutual Funds and Roth IRAs. If you are determined to plan for your retirement, even if you are older than 50, you can do it successfully.
By law, your employer must give you your 401k Plan's Summary Plan Description. You are also entitled to receive the Annual Return/Report for Employee Benefit Plans (Form 5500, Form 5500C, or Form 5500R). You also have a legal right to request any information regarding the basis of the 401k Plan. If you are receiving employee stocks, then you are required to receive paperwork documenting the stocks as well.
Did you know that if you are in the low-income bracket and contributing to a 401K plan that you may qualify for a tax credit? It is called the “Tax Credit for Low Income Savers” and the last time you may take this credit will be during the year 2006. This credit is in addition to the regular tax deductions allowable for the 401k plan. This is another boost to help those who are financially planning for their retirement. You should ask your accountant if you believe that you qualify for the tax credit.
When you reach the age of 70 ½ years old, you must take the required minimum distributions on your 401k plan. This money is taxable and must be reported as income when filing that year's Federal tax returns. Your Minimum Required Distributions may also be subject to state taxes as well. The minimum required distribution rate is calculated by dividing the adjusted market value of your tax-deferred retirement account as of December 31 of the prior year.
|Jennifer Mathes, Ph.D.|