401 K Q and A

What is a 401k plan?

The federal government established the 401k plan as a way for people to save for their retirement. In order to encourage savings, the government created special tax advantages for 401k participants. Your 401k plan is an incredible investment opportunity designed to assist you in reaching your retirement goals. Every company's 401k plan is a bit different, however. It was set up by your employer as a simple, convenient retirement savings vehicle that delivers significant tax benefits while you are working. It enables you to build personal wealth in the future. Your Summary Plan Description (SPD) will provide you with more detail on the specifics of your plan. Ask your Human Resources Department for a copy of this document.

How do 401k plans work?

A 401k plan is a retirement plan set up by your employer. When you join a 401k, you agree to contribute part of your salary to the 401k account. The money you contribute to your 401k is deducted from your paycheck before income taxes are taken out, so you end up paying less income tax. Additionally, you don't pay taxes on the money you contribute (and any interest it earns) until you withdraw money from your account at retirement -- so you enjoy the benefit of several years worth of tax-deferred compounding (which means your savings add up quickly!). Each company's 401k plan has different rules, so the best source of information on your plan is the Summary Plan Description document. You can get a copy from your company's Human Resources Department or your benefits representative.

How does my 401k plan help me?

Your 401k plan helps you to start and stick with regular investing. Your contributions are automatically deducted from your salary before you receive your check. Since the money is deducted from your gross income, you will have lower taxable income, which means you will pay less in annual taxes. You couldn't ask for a simpler way to save! The money you save will accumulate on a tax-deferred basis. This means you pay no Federal or State taxes on your contributions or investment earnings until you start withdrawing money from the plan. The benefit of a tax deferred account is that your dollars accumulate more quickly because your earnings are exempt from current taxation.

How will my 401k account affect my Social Security Benefits?

Your 401k account will have no effect on the amount of Social Security benefits you will be able to receive. However, it is important to realize that Social Security is not intended to provide for your entire retirement, but is meant to serve as a supplement to other income sources. For example, if your current income is $30,000 per year, the benefit you receive from Social Security will be approximately 40% of this, or $12,000 per year. This percentage varies according to your income. Hence, if you'd like to maintain the same standard of living you had while you were working, you do not want to rely on Social Security to be your only source of income after retirement.

What information is my employer required to provide me regarding my 401k?

Legally, all a participant is required to receive is a Summary Plan Description, a Summary Annual Report and an annual statement. You might not receive a prospectus for every fund offered in the plan, but if your company's stock is offered in the plan you must receive a prospectus (or prospectus substitute) for that. Luckily for participants, most plan sponsors provide participants with a lot more information than required. Keep in mind that often if you need more information, all you have to do is ask.

When can I begin to participate?

That depends on the rules of your specific plan. Many companies require new employees to complete six months or even up to a year of service before they're eligible to participate. Some companies also require employees to be at least 21 years old to participate. Ask your company's Human Resources Department or Benefits Representative for information on your plan. This information is also available in your Summary Plan Description.

What happens to my account if the company I work for goes bankrupt?

All the contributions made to a 401k account are held in trust by a custodian separate from the company sponsoring the plan, meaning that your employer does not have access to any of the money that is contributed to your 401k. In other words, regardless of whether your employer goes bankrupt or is bought by another company, the vested amount of money in your account is always yours.

How much money am I allowed to contribute each year?

If you are under the age of 50, the 2010 limit for contributions to your 401k plan is $16,500. This limit is generally adjusted for inflation in $500-$1,000 increments annually. In addition, Highly compensated employees are usually limited in how much they can defer due to IRS testing requirements. If you are over the age of 50, you now also have the option of making "catch-up contributions" in order to accelerate your savings. As mentioned above, the maximum amount of employee contributions for the year 2010 is $16,500. However, if you are over 50, you have the option of contributing an additional $5,500, bringing the limit up to $22,000. Similar to the increases in the contribution limits, this "catch-up contribution" amount may also be adjusted annually for inflation. For more information, please contact 401(k) Focus or your Human Resources Department.

What are Catch-Up Contributions?

People age 50 or older may make an additional contribution above any IRS or Plan limit. The Catch-up Contribution amount for 2010 is $5,500.

What is the Tax Credit for contributions?

The Tax Credit for low income savers is a temporary, nonrefundable tax credit for lower income taxpayers who make salary deferrals to 401(k), 403(b), 457, SIMPLE or SEP plan, or regular or Roth IRA. You should consult your tax advisor for more information on this credit.

How can I change my contribution amount?

To change your contribution amount, see your Human Resources Department.

What does vesting mean?

The "vested" portion of your 401k account is the part that is yours and that cannot be forfeited. To better understand, consider that there are two types of 401k contributions: the contributions you make and the contributions your employer makes (such as "matching" contributions). The money you contribute to the plan is always 100% vested. In other words, whatever money you put into the plan, adjusted for any investment gains or losses, is always 100% yours. The money your employer contributes, however, may be subject to a vesting requirement. Vesting requirements are very common in 401k plans and simply mean that you must earn your employer's contribution over time. For example, if you have only worked for the company for three years, which equals 40% vested under your plan's vesting schedule, you would only be entitled to $40 of every $100 contributed by your employer.

When will my company's contribution be vested?

That depends on the rules of your particular plan. Plan sponsors have some flexibility in deciding vesting schedules when the plan is set up. In some plans, participants are 100% vested as soon as they join the plan, while in others, participants have to complete a set number of years of service before they're fully vested. By law, all participants must be fully vested in the plan matching contributions after six years of service and other employer contributions after seven years of service with the company. Additionally, there are a few guidelines that typically apply to most plans. For instance, in most plans participants automatically become fully vested when they reach age 65, if they die or become disabled, or if the plan is terminated. Check with your company's Human Resources Department or Benefits Representative regarding the rules of your specific plan.

How do I choose which funds to put my money into?

Many issues need to be considered when you are choosing your investment allocation. Two of the most important factors that need to be taken into account are how long you have until retirement and your personal risk tolerance. If you have many years until retirement (more than five is a good benchmark for some, but 10 or more years is even safer), then you can often afford to take more risk in your investments. However, you do not want to be uncomfortable with your choices, so you must find the perfect mix of investments for you personally. Reading a fund's prospectus or speaking with an investment advisor are just two examples of resources that may help you in this decision. You can speak to one of our investment advisors by calling 1-888- 321-401k during regular business hours. Don't forget-you can always change your investment allocation if you find that your first choice isn't working for you.

How often can I change my investment choices?

You may change your investment choices as often as you wish to. Simply log on to your account or use our automated phone service, VoiceLink. You may access VoiceLink by calling 1-888- 321-4015. Both options are available 24 hours a day, seven days a week (except during scheduled maintenance times, which vary).

What types of risk will my money be exposed to?

Your account will be exposed to a variety of types of risk depending upon how you choose to allocate your funds between investments. Investing in stocks, for example, exposes you to the everyday volatility of the market, but long-term they often tend to have the highest potential for gains. If you choose to invest in foreign stock, you run the risk that a political problem may arise overseas or that exchange rates will drop, thus affecting your return. If you invest in bonds, there is a chance that interest rates drop, and the possibility that inflation may be higher than your return, meaning that you are actually losing money. There is no way to escape the risk that your investments will decrease in value, although some types of investments are seen as "less risky" and others as "more risky". Bonds, for example, are seen as less risky when compared to stocks. However, generally speaking, the higher the risk the higher your potential for greater gains. While it is impossible to completely avoid risk, there are certain things that you can do to decrease your chances for losses in your account. Most importantly, avoid putting all of your money into one fund, or one type of fund. Spread your assets among a variety of funds within your plan so that if one fund is not doing well, you have a chance for your other investments to make up for any losses. Bear in mind that everyone has a different tolerance for risk and the closer you are to retirement, the more closely you may want to guard your amount of risk exposure.

Can I take money out of my 401k plan once it has been contributed?

While 401k plans were developed as a means for saving for retirement, there are a few cases where money can be taken from your plan before you retire. Loans: Some 401k plans allow for a loan to be taken against funds you have contributed to the plan. Each company has its own provisions for loans and they often require that the money can only be taken if there is an extreme hardship, such as medical expenses, prevention of eviction or foreclosure, purchase of a primary residence, funeral expenses, or post-secondary education. To find out whether your plan offers a loan provision, check with your Human Resources Department or check your Summary Plan Description. Hardship Distribution: As the name suggests, some plans allow for a distribution in times of extreme financial hardship, such as those listed above. However, not all plans allow for this, and if this option is used before the age of 59½, a 10% penalty tax will be assessed on the distribution. You will also have to pay applicable income taxes and will not be able to participate in the 401k plan for six months. Check with your Human Resources Department or your Summary Plan Description for more information specific to your plan. Distribution upon termination of employment, death or disability:Upon termination, death or disability, you or your beneficiary will have the option of rolling over your account balance into another qualified plan or IRA (not available to beneficiaries other than your spouse), or taking a cash distribution. If you choose to a cash distribution, 20% of your account balance will be held for income tax purposes, in addition to a 10% penalty tax if you are under the age of 59½ (does not apply to deceased participants). In order to defer taxation on a cash distribution, these funds must be deposited in a qualified retirement plan of IRA within 60 days of the date of distribution.

What happens to my 401k money if I switch jobs?

If you switch jobs, you have three options for what to do with the vested portion of your 401k account. The following outlines your options and tax implications for each: If your vested account balance is $5,000 or more and you're under age 65, you can leave your money where it is, and taxes won't be due until you withdraw money from the plan. If your vested account balance is under $5,000, you may be forced by the employer to take a distribution. Consult with your Human Resources Department for more information on a forced distribution. You can roll your 401k account over into a rollover IRA account or into your new employer's 401k plan. If you request a direct rollover, meaning you have the money transferred directly into the new account, you won't owe taxes until you withdraw money from the account; OR You may take a cash distribution for the full amount or a portion of your balance and not roll it over into a rollover IRA or another 401k plan, However, cash distributions are subject to applicable income taxes and penalties. For tax purposes, 20% of your balance will be automatically withheld plus a 10% early withdrawal penalty (if you are under the age of 59½).

Can I roll my 401k money from my old job into my new company's plan?

Yes, if your new company's plan allows rollovers. If you roll over your 401k money into another company's 401k plan, you maintain the account's tax-deferred status and will not have to pay taxes on your 401k assets until you withdraw money from the plan. If your new company does not allow rollovers, you have two other options that would allow you to maintain the account's tax-deferred status: If your vested account balance is $5,000 or more and you're under age 65, you can leave your money where it is -- and taxes won't be due until you withdraw money from the plan. OR You can roll over your 401k into a rollover IRA account. If you request a direct rollover, meaning that the money is transferred directly into the new account, you won't owe taxes until you withdraw money from the account.

How do I apply for a distribution once I have terminated employment with my company?

Once you have terminated employment with your company, you should be sent a distribution package that details your options and also includes the forms necessary to obtain a distribution. Remember that initiating the distribution is your responsibility so make sure that your address is up to date with your employer as well as the administrator of the plan. It never hurts to follow up to make sure your distribution package is sent to you and your distribution is in process.

How soon after I terminate employment can I expect to receive my distribution?

Many factors can affect how long it takes for you to receive your distribution. First, each plan has its own rules for how often distributions can be done- monthly, quarterly (every three months) or annually, for example. Keep in mind that a 401k is designed for retirement and is not like a savings account at a bank. You may have to wait anywhere from 30 days to a year or more before receiving a distribution. Typically, 401k plans process distributions on a monthly basis. For example, if your plan has a monthly distribution frequency, you will receive a distribution following the close of the month in which your correctly completed distribution paperwork was received by the plan administrator. Depending on many factors, distributions can take 30 to 60 days to process. To find out the frequency of distributions for your company, consult your Human Resources Department or your Summary Plan Description.

Will I have to pay taxes on my 401k plan if I leave my company?

That depends on what you decide to do with your 401k money. You have several options: If your vested account balance is $5,000 or more and you're under age 65, you can leave your money where it is -- and taxes won't be due until you withdraw money from the plan. OR You can roll over your 401k into a rollover IRA account or into your new employer's 401k plan. If you do a direct rollover -- have the money transferred directly into the new account -- you won't owe taxes until you withdraw money from the account. If you elect to take your money out of the 401k and not roll it over into a rollover IRA or another 401k plan -- you will owe all applicable taxes plus the 10% early withdrawal penalty (if you are under age 59 1/2).

What is the penalty if I take money out of my 401k before I'm 59 1/2?

Ten percent of the untaxed money you withdraw, plus applicable federal, state and local taxes on that amount. So if you withdraw $5,000 from your 401k before age 59 1/2, you would owe a penalty of $500 (plus applicable federal, state and local taxes on the entire $5,000). To withdraw money before age 59 1/2 and avoid the 10% premature withdrawal penalty, you have to meet one of the following criteria (subject to the rules of your 401k plan): You are totally disabled, you are deceased and your beneficiary is collecting the money, you're in debt for medical expenses that exceed 7.5% of your adjusted gross income, you are required by court order to give the money to your divorced spouse (or to a child or dependent), you're separated from service (including permanent layoff, termination, quitting, taking early retirement, etc.) and you're at least 55 years old, you're separated from service and you've set up a payment schedule to withdraw money in substantially equal chunks over the course of your life expectancy. (Note that as attractive as this option may sound, once you begin taking distributions you are required to continue for 5 years or until you reach age 59 1/2 -- whichever is longer.) Any money withdrawn for the above reasons is still subject to applicable federal, state and local income taxes.

How is the 10% penalty tax calculated?

The 10% penalty applies to the entire untaxed amount that you withdraw. If you withdraw $5,000 from your 401k before age 59 1/2, you would owe a penalty of $500 (plus applicable federal, state and local taxes on the entire $5,000). If you've made after-tax contributions to your 401k, it gets a bit more complicated. You do not have to pay the 10% penalty or any additional taxes on the amount of your after-tax contributions. You do, however, have to pay the 10% penalty and all taxes due on any interest earned and employer-matching contributions made as a result of your after-tax contributions. If you're thinking "I'll just take out my after-tax contributions and leave the earnings where they are" -- nice try, but no dice. For every after-tax contribution dollar you withdraw, the IRS requires you to withdraw a proportional amount of the earnings, too. To avoid paying current income taxes and the 10% penalty you can roll your account balance over into an IRA. To learn how to open an IRA account and roll over your 401k balance visit the IRA Center.