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401k Retirement Plans - Contribution Limits, Rules, Contributions & Distributions, Rollovers, IRS forms, Roth 401k, Roth IRA and more.
(January 28th, 2012) This article provides an overview of 2011 and 2012 401k contribution limits, catch up contributions, pre-tax and total contribution limits that apply as well as rules that highly compensated employees must follow. Before 2001, the maximum contribution limits on 401k retirement accounts was too low, not encouraging many employees to bother saving for retirement. However, after the Earnings to Lift Individuals and Empower Families (RELIEF) Act of 2001, the government has increased the maximum 401k contribution limits, as well as released the feature of Catch up contributions to allow those people 50 or over to save more money towards retirement, and thus "catch up." Starting 2006 and the years beyond, the maximum 401k contribution limits will be incremented each year to match with adjusted inflation. Pre-Tax 401k Contribution Limits Below are the pre-tax individual 401k contribution limits set by the IRS, starting from 2004.
Pre-Tax 401k Catch Up Contribution Limits 401k investors who reach the age of 50 before the beginning of the calender year are permitted to make additional Catch Up contributions to their 401k retirement accounts, the limits are shown below on a pre-tax basis.
(December 29th, 2009) The April 15th deadline for filing taxes to the IRS is also the deadline for investors to make their final Roth IRA & Traditional IRA contributions for that tax year. For instance, April 15th, 2009 will be the deadline for making contributions towards the 2008 tax year. After this date, any contributions made will be applied towards your 2009 tax year (for which the deadline will be April 15th, 2010). This differs from 401(k) plans that have December 31st, as the deadline for making 401(k) contributions. The IRS considers these deadlines to be 'do or die' cases where if investors miss the contribution deadlines, they forfeit their priviledge to make 401k or Roth IRA contributions for that tax year. If you have already filed your taxes before the April 15th deadline and have not made Roth IRA contributions, you can do so and file an amended tax return using Form 1040 (U.S. Individual Income Tax Return) i) Roth IRA Contribution Limits
ii) Simple 401k & Simple IRA Contribution Limits
Contributions to a Roth or Traditional IRA must be made through eligible incomes which comprise of the following: i) Earned wages or taxable compensation
When Should You Borrow a 401(k) Loan? When you need liquid cash urgently for a serious short-term need, a 401(k) loan from your retirement savings would sound probable. Short-term need is defined as less than 12 months. Also, a serious cash need is something that is really urgent, and not the purchase of a 47-inch Panasonic television. A 401(k) loan from your retirement savings is a quick, cost-effective way of borrowing, and it does not create a taxable event unless the limits placed on the loan are violated and the loan is not repaid on time. Also, if you pay back the short-term 401(k) loan on time, it will not significantly impact the total growth of your nest egg upon retirement. Infact, sometimes it may even have a positive impact on your total nest egg. Basics of 401(k) Loan Borrowing 401k loans are not actually loans because there is no lender, and there is no examination of your credit rating. A 401(k) loan is the ability to reach in to your retirement nest egg and withdraw up to $50,000 or 50% of your total retirement savings, whichever is lesser. After that, you must pay back this money within 1 year to restore your 401(k) to its original level. The feature that really stands out in this transaction is that this whole process is tax-free, thus when you withdraw the $50,000, you will not be taxed on it, thus treating it as a tax-free cash withdrawal! Another cool feature of 401(k) loans is the Interest. For the 1 year period that you borrow the loan, you will have to pay interest fees, however these interest fees are added back to your original 401(k) nest egg. Thus, this is not a borrowing cost, infact you are paying yourself back. This feature is a lot more attractive than having to borrow money from banks and paying their outrageous 10%+ interest rates.
(October 27th, 2008)
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Video Review Dr. Greg Kasten (Unified Trust Company): The hidden trading costs or what we call these transaction costs stem from not the plan participants' doing any trading but the actual managers of the mutual funds buying stocks or bonds. They try to manage their portfolios in an attempt to outperform the markets; which is very difficult. Commentator (Mike Schneider from Bloomberg TV): What's difficult is also expensive. The funds don't disclose all the charges they incur when they trade; in many cases they can double the cost you think is inside the fund and its not uncommon at all even in very very large plans that it adds 50% to the cost. Ford Motor Co. proved no exception, so we asked Dr. Kasten to review Ford's 401k plan; one of the biggest plans in the country with nearly $12 billion in assets. According to Greg for the year 2004, the most recent year available, the returns were less than 0 - 4/10ths of a percent to be precise. The poor performance was due to a # of reasons, but were hidden brokerage costs one of them? Kasten says, yes! Kasten discovered 0.43% in hidden brokerage fees, which translated into $17.2 million. Overtime, that half a percent can make a bigger difference than you might expect for each of the workers in the Ford plan. Dr. Greg Kasten (Unified Trust Company): How much of a difference? Maybe 10% - 15% of their retirement account ending balance will be gone because they didn't pay attention to those hidden brokerage & trading costs.
Most retirement investors know that if you withdraw funds from your 401(k), traditional IRA or 403(b) plan before the age of 59 and 1/2, you will be charged with a 10% early distribution penalty; however there are always exceptions to this rule. Also, this rule does not apply to Roth IRA, you can withdraw as much of what you have contributed to your Roth IRA as long as your plan has been in existence for atleast 5 years. Thus if you withdraw $5000 from your 401k plan at the age of 45, you will have to pay a $500 penalty, as well the $5000 will be included in your taxable income when you file taxes; a double whopper! Therefore, it is essential to know the rules & exceptions you have to work your way around this and borrow from your 401k plan without facing an early distribution penalty. You cannot however prevent the $5000 withdrawal from being included in your taxable income during tax time, unfortunately! If you withraw money from a Simple IRA that you started contributing to only 2 years ago, the early distribution penalty is increased from 10% to 25%! The additional tax on early 401k distributions is filed on Part 1 of IRS Form f5329
Exceptions for Early Withdrawals from Traditional IRA - If the IRS levies your IRA for any tax debts you
owe
Retirement saving can be started by persons from all ages, from 21 to 65. However, it becomes even more essential for seniors from the age 55 to 64 year olds to start thinking deeply towards their retirement as it will be pending in a decade or so. It is never too late to start saving for retirement, however from the age of 54, it becomes very important to have a retirement plan that will help you accomplish your goals and live the good life you have always dreamed of living. This article will help you decide if you are financially ready for retirement or if you have a projected shortfall and if you need to modify your 401k or Roth IRA contributions, saving strategies, goals or objectives to meet the shortfall. To calculate this, you will need to amalgamate the following information: i) Balance of all your 401k or Roth IRA retirement
plans
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Video Review Commentator (Mike Schneider from Bloomberg TV): A survey done by AARP in 2007 showed 8 out of 10 respondents with 401(k)s didn't know the cost of their plans. That's because many of the fees, all of them legal, are buried in the fine print of obscured documents or are so confusing that they might as well be written in a foreign language. Examples of confusing fees are: - 12B-1 Fees Commentator (Mike Schneider from Bloomberg TV): It's a complicated puzzle, but the US Department of Labor counts there are atleast 17 fees that can be charged to your 401k plan. Right now you will be lucky to find even one of them by name in your account statement. What you don't know can hurt you. After 40 years of 401k investing, you can say goodbye to 1/2 of your potential nest egg. We want to show you how to find these hidden fees, who's charging them and how it's being done without you knowing it.
Starting 2008, contribution limits will be raised by $500 a year to account for inflation. Here are the advantages and disadvantages of the Roth IRA. Advantages - If money was converted from a Traditional IRA to a Roth IRA, the investor can withdraw up to the total amount of the converted amount so long as the money has stayed in the Roth IRA for atleast 5 years. - Withdrawals of capital gains (any earnings made on the invested amounts) are tax-free if the investor has reached 59 and 1é2 years of age. - Direct contributions to a Roth IRA can be withdrawn tax-free and without any penalties since they have already been taxed when the contributions were made. - Up to $10,000 can be withdrawn from the Roth IRA to purchase a principal residence. The house must be bought either by the Roth IRA owner, their spouse, or ancestors or descendants. The trick here is the Roth IRA owner must not have owned a home within the last 24 months to qualify for this clause. - Contributions to a Roth IRA can be made even if the investor contributes to other retirement plans such as the 401k, 403b or qualified education savings plan. - If a Roth IRA investor dies and his spouse becomes the sole beneficiary of the funds, he or she can combine the two separate Roth IRA accounts into 1 without any penalties or tax. - If the Roth IRA investor expects his tax bracket to be higher upon retirement, there is an advantage to making Roth IRA contributions now. Since these contributions are taxed at the current lower rate, the investor does not have to worry about paying taxes when he hits retirement. For example if the investor is currently in an 18% tax bracket, a $10,000 contribution to a Roth IRA would incur $1800 in taxes. If the investor expects to be in the 30% tax bracket upon retirement, the same $10,000 would incur $3000 in taxes. Thus the advantage of Roth IRA is paying the tax now and not worry about having to pay Uncle Sam when you hit retirement. - Unlike all other retirement plans including the Roth 401k that require you to take out distributions by April 1st, the Roth IRA does not require you to take out minimum required distributions (MRDs). - Any earnings from the Roth IRA are not taxable if withdrawn after 5 years of the establishment of the Roth IRA, and the participant must be 59 and 1é2 years of age at the time of withdrawal.
If you read our article on advantages of Roth IRA, you know that tax-free growth of earnings, tax-free distributions and flexible withdrawal rules are just some of the great benefits of having a Roth IRA. Furthermore, the fact that no minimum required distributions are required once you turn 70 and 1/2 years old is another advantage. You might therefore have tried converting your Traditional IRA or SEP/Simple IRA to a Roth IRA but may not meet the modified adjusted gross limit (MAGI) rule. The MAGI rule states that if your adjusted gross income exceeds $100,000 a year for 2008, you will not qualify for Roth IRA conversion. Also, if your status is 'married but filing separately', you will not qualify for Roth IRA conversion. There is where the Tax Increase Prevention & Reconciliation Act of 2005 (TIPRA) comes into play. TIPRA Is Signed into Law Prez. Bush signed TIPRA into law on May 17th, 2006. It includes a provision that allows conversion of Traditional IRAs to Roth IRAs. It also includes a provision that eliminates the $100,000 modified adjusted gross income limit starting January 1st, 2010. Also, investors who convert into Roth IRAs in 2010 can spread their taxes owed over 2 years, 2011 and 2012. This is treated more like an interest-free loan from the IRS that will not be paid until 2011 and 2012. After this, any gains you make on your Roth IRA investments will accrue taxes on a deferred basis and any distributions will be tax-free if you meet the Roth IRA hardship withdrawal rules. So you ask, what can you do to take full advantage of TIPRA? We suggest contributing as much as you can to your Traditional IRA, SEP/Simple IRA or your 401k/403b plan so that you can convert these funds to a Roth IRA in 2010 without having to face the $100,000 modified adjusted gross income limit. What if you do not have any 401k or Traditional IRA plan? Your next best bet would be a non deductible IRA. Non Deductible IRA? If your modified adjusted gross income (MAGI) exceeds $100,000 and prevents you from making Roth IRA contributions, a non deductible IRA would be your next best option. If you are less than 70 and 1/2 years old in the year you are making the contribution, you can contribute $4000 to a non deductible IRA ($5000 if you are 50 years or older); or you and your spouse could contribute $8000 ($10,000 if both of you are 50 years or older) under the 'married and filing joint' clause. For example, consider Jane and John who are both 50 years old and are making $10,000 a year contributions to a non deductible IRA (under the 'married and filing joint' clause). They do this till they are 65 years of age. Here's the math: Annual Contributions = $10,000 At this point, Jane and John could convert their non deductible IRA into a Roth IRA. Therefore, they will owe taxes only on ($246,725.28 - $150,000) = $96,725.28. What's more, they will not have to worry about taking minimum required distributions once they reach 70 and 1/2 years old because that clause does not apply to Roth IRAs. Tax Planning If you want to convert your Traditional IRA or 401k to a Roth IRA in 2010, be sure to set aside extra money for the taxes owed on the Roth IRA conversion. Here's a way to estimate taxes owed. Say your Traditional IRA is currently worth $50,000 (as of January 1st, 2008). By 2010 at an annual rate of return of 6%, your Traditional IRA will be worth 56,180. You will then have to declare this amount as income for the tax years 2011 and 2012 and owe taxes. Say you're in the 18% tax bracket, your tax liability of $10,112.40 will be spread over 2 years. After this point, you or your future beneficiaries will never have to pay taxes on qualified Roth IRA distributions ever again, no matter how much your nest egg grows. On the other hand, you will actually face a larger tax bill if you let your money stay in the Traditional IRA tax-deferred. Here is a comparison.
But before we do that, lets look at how this change was brought about. The Pension Protection Act of 2006 (PPA) amended the rules of how corporate retirement plans could be converted to Roth IRAs. Prior to the PPA of 2006, a Roth IRA could only accept rollover contributions from another Roth IRA (also known as qualified rollover contributions). This provision created a 2 step process for investors who wished to convert their corporate retirement plans to Roth IRAs. First, investors had to roll over their funds to a Traditional IRA and then make a qualified conversion to a Roth IRA. The Pension Protection Act of 2006 amended this rule by allowing other eligible retirement plans (such as corporate retirement plans) to be included in the definition of 'qualified rollover contributions.' This eliminated the need for investors to rollover their corporate retirement plans to a Traditional IRA, then make a conversion to a Roth IRA. Investors can now make a direct conversion from corporate retirement plans to a Roth IRA. IRS Notice 2008-30 On March 5th, 2008, the IRS released Notice 2008-30 defining the provisions for converting corporate retirement plans into Roth IRAs. Here are the provisions. i) Corporate retirement plans (401ks, 403bs or 457 plans) can now be converted directly to a Roth IRA. ii) Modified Adjusted Gross Income (MAGI) cannot exceed $100,000 whether you are filing a joint or single tax return. iii) You cannot be married but filing separate returns for the 2008 - 2009 tax year. This provision will be completely withdrawn starting 2010. iv) Any amounts that are converted to a Roth IRA that would otherwise be taxable must be included in income in the year of the conversion v) If the investor has after-tax contributions in his Non Roth account, the conversion to a Roth IRA will not be subject to the pro-rata rule. The pro-rata rule is when investors have to pay taxes on any pre-tax contributions (contributions that are made before taxes are deducted). Since tax has already been paid on the Non Roth contributions, any conversions or rollovers to a Roth IRA will not be subject to taxes. vi) Direct rollovers from Non Roth accounts to a Roth IRA are NOT subject to a 20% withholding tax; however 60 day rollovers are. Does it Make Sense to Rollover to a Roth IRA? It makes sense to rollover your corporate 401k account to a Roth IRA if you plan not to take any distributions for many years, or not at all. This is an important point to remember because if you do rollover to a Roth IRA and take out a distribution, you will be hit with a 10% early withdrawal penalty as well as owe taxes if you're under 59 and 1/2 years of age or are within the first 5 years of your conversion. Convert Inherited Retirement Plan Assets? One important change the Pension Protection Act of 2006 brought about was that it now allows non-spouse participants (singles) who have inherited retirement plan assets from either a 401k, 403b or other retirement plans to convert to an inherited Roth IRA. This is unique and very confusing because beneficiaries cannot convert their inherited IRA assets into Roths, they can however convert other inherited retirement assets into a Roth. Here are a couple of important points to remember about this: i) To convert retirement plan assets other than an IRA to a Roth, a non-spouse beneficiary must do a direct transfer of funds. A direct transfer means the funds are transferred directly from the administrator of your old retirement plan account to the manager of your Roth IRA, you do not get to enjoy the money in the process. ii) If the non-spouse beneficiary receives a distribution in a 60 day rollover, he/she will NOT be able to roll those funds into a Roth IRA, Traditional IRA or an inherited IRA. What's worse, the beneficiary will owe taxes on the distributed amount. iii) Be sure to verify that your corporate retirement plan allows non-spouse beneficiary rollovers to inherited Roth IRAs.
Contributing to a 401k plan has become ever more easier for small business owners as a result of new legislation brought about by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The EGTRRA has made 401k plans more flexible, easy and beneficial for a small business owner. First, a small business 401k is also known by its other names; Individual(K), Solo 401k, or Self Employed 401(k). Another common misrepresentation of small business 401k plans is that only sole proprietors can open them. This is incorrect; infact partnerships & corporations can also opt for a small business 401k provided they are owned by eligible plan participants. Eligibility Small Business 401k plans can be set up by businesses whose only eligible employees to participate in 401k plans are the small business owners themselves. For eligibility purposes, a spouse is also considered a small business owner and if employed by your business, is also eligible to participate in a small business 401k. If your business has non-owner employees (employees who do not have any interest or shares in the business), then your small business is NOT eligible to participate in a small business 401k. What's more, if you have employees other than you and your spouse, you can still set up a small business 401k plan provided your employees are not eligible to participate in the plan. How do you know if your employees are not eligible to participate in your small business 401k? By the eligibility requirements selected for the plan. Here they are: Age: You can choose to exclude employees who are under 21 years of age. Years of Service: You can require an employee to perform atleast 1 year of work service before he/she becomes eligible to make salary deferral 401k contributions. You could also require your employees to perform atleast 2 years of service* before being eligible to participate in profit-sharing contributions. * For eligibility purposes, an employee has done 1 year of service if he/she has worked atleast 1000 hours during the year. Most small business 401k plans set the 1000 hours as the minimum required work service before employees become eligible to contribute to Small Business 401k plans. Be Careful When Making the Elections When choosing the eligibility requirements of your small business 401k, be especially careful not to exclude yourself from the plan. For example if you set an age eligibility requirement of 25 years while you are only 22, you are excluding yourself from your business plan. Also, if you set the minimum required work term as 0 years, you could make your part time employees (employees who work less than 1000 hours a year) eligible for your small business 401k and remember, if these employees become eligible for your small business 401k, your plan becomes void! Small Business 401k Contributions There are 2 types of contributions for small business 401k's. They are salary deferral and profit-sharing contributions. i) Salary-Deferral: Salary Deferral contributions can be up to 100% of your compensation income; no more than the salary-deferral limit for the year (which is $15,000 for 2006 and $15,500 for 2007). ii) Profit-Sharing: Your business may contribute up to 25% of your business net income (20% of your modified net profit for unincorporated businesses; with a limit of $44,000 for 2006 and $45,000 for 2007. Combined salary-deferral & profit-sharing contributions cannot exceed $44,000 for 2006 and $45,000 for 2007. Also, if you reach 50 by year-end, you can contribute an additional $5000 for 2005 and 2006. Comparison with Other Small Business 401k Plans In comparison with other small business 401k plans, this SBO 401k has very high contribution limits which is why so many small business owners are attracted to it. Here is a comparison of contributions limits for various types of small business 401k plans.
According to a study conducted by the Employee Benefit Research Institute in 2005, 20% of all 401k investors who were eligible for borrowing from their 401k plans (taking out 401k loans) did so. The average loan option exercised in 2004 was $6,946 which is about 1/2 of the average debt of households in America (excluding mortgage debt). The $6946 figure represents the following percentages of peoples' total retirement savings.
As you can note from above, as the person gets older, he has more retirement savings and tends to borrow less from his/her 401k plan. However, people in their 40s borrow about 2% more than people in their 30s, anyone have a logical explanation for this? Post your comments below if you do! And while it is good that as the person gets older, he tends to borrow less, it is not advisable to borrow from your 401k at all! We will go over 8 major reasons why you should never borrow from your 401k. Some financial advisors might tell you that borrowing from your 401k is better than using your credit cards or taking out a commercial loan with higher interest rates. They also say that when you repay your 401k loans, you will be repaying interest to yourself, and not some bank. While this is partially true, in the long term, you would be way better off accumulating your savings and gaining compound interest, rather than reducing your principal amount by borrowing money from it. 1) Your Savings Growth is Reduced If you take out a 401k loan, most plans have a provision that you cannot make any more contributions until a certain percentage of the loan is paid back. Some plans may even have a provision that states that 100% of the loan amount must be repaid! Added to that, even if your plan does not have a repayment provision, you may not be able to afford to keep up with your 401k loan payments and make additional 401k contributions (that you were supposed to make every month anyways). This significantly reduces your ability to grow your 401k savings. The whole point of 401k plans is to save for your retirement, by withdrawing any amount of money from it, you are really defeating the purpose of the plan!
There are high chances that you will rollover your 401k retirement plan atleast once in your lifetime, if not multiple times. A 401k rollover is usually done when an employee leaves his current employer and moves to another company. The administration of the employee's 401k account will be moved from old employer to new employer. A 401k rollover can also be done when a participant is eligible to rollover his current traditional IRA into a Roth IRA or Roth 401k. We will explain how to do these 401k rollovers right in this next section. Changing Employers & Avoiding the 20% Withholding Tax If you are leaving your existing job, that would be a great time to rollover your traditional 401k plan into an IRA. This option is even better than rolling over to your new employer's 401k plan. Why? Because your investment options are unlimited. In a 401k plan, your investment is limited to the mutual funds & stocks that your employer invests in. However when you rollover into your own IRA, you can invest in stocks, bonds, commodities & other higher yielding assets. When you leave your current employer, they will send you a check for your fully vested 401k retirement savings that you have accumulated. This is treated as a cash out transaction and your employer will be required to withhold a 20% tax amount, leaving you with only 80% of your cash. This is NOT what you want to do! Furthermore, you will be required to pay a 10% early withdrawal penalty if you are under the age of 55 and withdraw your 401k retirement savings as cash. To avoid this cash out transaction, you must arrange for a Direct 401k rollover. Also known as a trustee to trustee 401k rollover, this rollover will instruct your old employer to make out a check in the name of your new 401k plan manager or "custodian" as they call it. This way, you will not be getting any cash. Your 401k funds will be sent to your new 401k custodian. Ask your new 401k custodian exactly how they want to receive this payment. Usually it will be like "Investment Banking Corporation, for the benefit of Peter James..." The next step after this will be to inform your former employer's retirement plan admin that you are making a direct rollover of your funds to your new account. The admin will ask how you want this check to be styled & printed. As soon as you receive the check, you should deposit it into your new IRA. There is a 60 day limit within which you must deposit this check to your new IRA or 401k, otherwise you will be charged tax on it, as well as a 10% early withdrawal penalty.
What is a 401k Retirement Plan?
How Do 401k Plans Work? After 3-6 months of working for your current employer,
you might be asked to join a company sponsored or administered 401k retirement
plan. This plan works by you having to contribute a certain amount of
money from your monthly pay before tax is deducted (your gross income).
This amount is deducted even before you get paid, so there's an obvious
advantage to it; you can never skip a savings contribution! On top of
your contribution, your employer will "match your contributions"
by a certain percentage. Most organizations match by 5-10%. The total
contributions by you and your employer are then administered by a 401k
plan administrator who invests this money in to mutual funds, stocks,
bonds and other investments. It is up to you where you want to invest
your money in. Your 401k plan administrator will give you a list of all
investment vehicles available and their associated risk levels; you can
clarify the risk taking level you are willing to take. Advantages of Contributing Towards a 401k Plan i) Your contributions are tax free from Federal &
State taxes How Much Money can you Contribute to a 401k Plan? Contributions to a 401k plan can range from 1% - 20% of your annual salary. Annual 401k contribution limits are set by the Internal Revenue Service (IRS). For example, the maximum limit for 2007 contributions was $15,500.
The Roth IRA was introduced under the Taxpayer Relief Act of 1997, pioneered by the late Senator William V. Roth, Jr. Under a Roth IRA, an individual can invest in all types of investment vehicles including common stocks, mutual funds, futures & options, certificates of deposit, as well as real estate. The main advantage of Roth IRA is its tax structure. Contributions to a Roth IRA are made only from earned income that has been taxed by the Federal government. Since you already pay taxes before saving your money in a Roth IRA, you are not required to pay federal taxes when you make withdrawals from your Roth IRA. Also, any capital gains you make on your Roth IRA investments can be withdrawn tax-free! Difference between Traditiona IRA and Roth IRA In a traditional IRA, any contributions you make are tax-deductible and any withdrawals you make will be taxed by the federal government. This works inversely with a Roth IRA where any contributions you make is not tax-deductible (because you have already paid taxes on this), and any withdrawals you make will NOT be taxed by the federal government. Roth IRA Contribution Limits
Starting 2009, Roth IRA contribution limits will increase by $500 per year to adjust for inflation. Advantages of Roth IRA i) Roth IRA owners can withdraw up to the total value of their contributions at any point in time, without having to pay the 10% early withdrawal penalty or any federal income taxes. ii) Upto $10,000 can be withdrawn without any penalty if the owner wishes to purchase a home or principal residence. The home must be purchased by either the Roth IRA owner, his spouse, ancestors or descendants. Also, the Roth IRA owner must not have previously owned a home for atleast 24 months....
The Internal Revenue Service (IRS) allows 401k investors to take out 401k hardship withdrawals in the form of loans only if these 6 criteria are met: i) the withdrawal is due to an immediate and important
financial need 401k Hardship withdrawals are permitted by some large companies, but due to the high costs of administering them, they may not be readily available in smaller companies. Check with your Human Resources department to see if 401k hardship withdrawals are permitted in your 401k program. The following are reasons acceptable by the IRS for a hardship withdrawal i) Repairs of primary residences 401k hardship withdrawals are subject to a 10% early withdrawal penalty as well as income taxes due. For example if you withdraw $10,000 as hardship withdrawal, you will owe $1000 in penalty, as well as be taxed on the $9000. There are some hardship withdrawals however that are not subject to the 10% penalty, they are: i) You stop working, get laid off,
quit or retire in the year you turn 55 or after
A Simple 401k plan is less well known than its counterparts Simple IRA and a traditional 401k but actually combines the best of benefits provided by both plans into 1 single plan, the Simple 401k. In this article, we explore some of the features provided by Simple 401k plans and advantages/disadvantages. Advantages of Simple 401k Plans i) No Testing - Traditional 401k plans require intensive testing to make sure the plan works in compliance with regulatory requirements set out by law. Such testing must be done by 401k professionals and can be very costly. On the other hand, Simple 401k plans do not require such testing and can be very appealing to small business owners who do not have the capital to expense to all the heavy testing that traditional 401k plans require. ii) Borrow Loans - Simple 401k plans make it easier to borrow loans from one's 401k and pay it back in the form of principal and interest payments. Disadvantages of Simple 401k i) Immediate Vesting - With traditional 401k plans, new employees may be required to work a minimum # of years or months before they can make contributions to the company's 401k plan. This can work in the form of a contribution vesting schedule. With Simple 401k, contributions are vested 100% immediately. This means employees who meet the eligibility of taking distributions from their retirement accounts may do so at any time, even if it means withdrawing their entire savings account. ii) Lower Contribution Limits - The contribution limits for Simple 401k plans are lower than those of traditional 401k plans. Here's a comparison of salary deferral limits for both plans.
iii) Limited Employer Matched Contributions - Employer matched contributions are limited to 3% of the employee's compensation while this is up to 25% for traditional 401k plans. iv) One Plan Limitation - An employer who participates in a Simple 401k plan cannot maintain any other retirement program for any of its employees that are eligible for Simple 401k contributions. On the other hand, an employer who maintains a 401k retirement program for its employees may also administer and have other defined-contribution plans, SEP IRAs, profit sharing and Roth IRA plans. Eligibility for Participation i) Every employer who is eligible to run a traditional 401k program for its employees is also eligible to administer Simple 401k. Examples include sole proprietors, partnerships and corporations. However, Simple 401k plans are limited to employers who have a maximum of 100 employees, each receiving compensation in excess of $5000 annual. ii) Employees who have worked for their current employers for at least 1 year and who are 21 years or older must be allowed to participate in the Simple 401k plan.
(January 27th, 2008) While there are many similarities between simple IRAs and Simple 401k plans, there are many differences as well. In this article, we compare and contract between Simple IRAs and Simple 401k plans. Eligibility i) Employers - For both the Simple 401k and Simple IRA plans, employers must have a maximum of 100 employees or less who receive at least $5000 in annual compensation. Also, employers cannot maintain any other retirement plan for their employees who are eligible for the Simple 401k other than the Simple 401k. The employers can however run another retirement plan for employees who do not qualify for making contributions into the Simple 401k. By contrast, an employer who runs a Simple IRA for his employees is not permitted to run any other retirement program no matter what. Therefore if an employee does not qualify for making contributions to a Simple IRA while his employer only administers a Simple IRA, then too bad for that employee! ii) Employees - Employees are normally required to perform at least 1 year of service before they are eligible to participate in an employer's Simple 401k plan. They must also be at least 21 years of age. By contrast, there is no age requirement for Simple IRA and no minimum 1 year service. Any employee who has earned at least $5000 in annual compensation in the last 2 years, and is reasonably expected to earn $5000 annual compensation this year is permitted to contribute to a Simple IRA plan. The deadline to establish a Simple 401k or a Simple IRA is January 1st to October 1st of any given year. If a new business or corporation is formed after October 1st, then they are permitted to set up a Simple 401k or a Simple IRA. This deadline allows employees to make salary deferral contributions before the year end. Also, because a Simple IRA is part of Individual Retirement Accounts, no loans are allowed to be withdrawn. By contrast, a hardship withdrawal or loan is permitted under the Simple 401k. Go here to learn more about 401k hardship withdrawals. Also, all contributions to a Simple 401k or a Simple IRA are 100% immediately vested. Making Contributions to Simple 401k or Simple IRA Employees are eligible to make salary deferral contributions to these retirement plans while employers can make matching contributions. For matching contributions, employers can make contributions of up to 3% of the employee's total annual compensation. Here are the deferral limits for both the Simple 401k and Simple IRA programs: Year Salary Deferral Contribution Limits
Introduced in January 2006 under a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001, the Roth 401k is different from the traditional 401k plan because contributions are made after-tax (meaning after tax has been deducted off your pay). The Roth 401k is very similar to the Roth IRA; investors receive no tax deduction on annual contributions, but any withdrawals or proceeds will not be subject to tax either. Investors who own 403b plans are also eligible to contribute to Roth 401k. The government was more than happy to introduce this new piece of legislation because it means investors will pay more tax now, rather than making salary deferral contributions as in the case of traditional 401k plans. The Roth 401k works inversely with a traditional IRA. With a traditional IRA, an investor receives current tax deduction after making contributions. Instead of this money going to the IRS now, it will stay with the investor and he can invest it in stocks/bonds/mutual funds or real estate. Over time, this money will grow tax-deferred. The government likes this idea too because say after 30 years of investing in various stocks/commodities/real estate, an investor has grown his money from $50,000 to $200,000. If he withdraws this money from his IRA, he will have to pay taxes not on the initial $50,000 but on the whole $200,000! The Roth 401k works inverse with the above idea. The money you earn this year is taxed this year. You make contributions to a Roth 401k from your after-tax earnings. When you reach the age of 59.5 or more, you are eligible to make withdrawals that are not taxable (because they have already been taxed). The prospect of receiving tax-free money upon retirement is an idea liked by many investors. The idea of receiving tax dollars now is very much liked by the government such that some senators have proposed getting rid of traditional 401k plans or IRAs. Roth 401k Works Best if: - The federal government increases taxes over time
The Roth IRA was created by the Taxpayer Relief Act of 1997, pioneered by the late Senator William V. Roth, Jr. and was made effective on January 1st, 1998. Before 1998, investors who wanted to contribute towards an IRA would either make a deductible or non-deductible contribution to a Traditional IRA. Distributions taken from a traditional IRA were taxed as normal income, and early withdrawals before the age of 59 and a 1/2 were subject to a 10% early withdrawal penalty. The Roth IRA allows investors to take tax-free qualified distributions from their Roth IRAs without having to pay the 10% penalty. Here's how it works. Qualified Roth IRA Distributions? Non-qualified Roth IRA distributions will be subject to normal income tax and a 10% early withdrawal penalty. A qualified distribution on the other hand must meet these criteria: i) The distribution occurs at least 5 years after the investor established and funded his Roth IRA account. For this purpose, the five year period begins with the first day of the year for which the first contribution was made. For example, if the contribution was made on April 14th, 200, the 5 year period begins January 1st, 2000. ii) The distribution must be taken under one of the following circumstances: - the Roth IRA investor must be 59 and 1/2 years or
older at the time of the distribution Taxing the Non Qualified Roth IRA Distributions How non-qualified Roth IRA distributions are taxed depends on the source of the Roth IRA's assets. There are 4 possible sources of Roth IRA assets: - Normal contributions by the investor The IRS uses the source of the Roth IRA's assets to determine 'ordering rules' of how assets will be distributed from the Roth IRA account. They are distributed in the following order: 1. Normal Roth IRA contributions by the holder Important Fine Print i) Distributions of Roth IRA assets from normal participant contributions and from non-taxable conversions of traditional IRA assets can be taken anytime, tax free, if the 2 above criteria are met. ii) Non qualified distributions of taxable traditional IRA conversion assets are subject to 10% early withdrawal penalties. iii) Non qualified distribution of capital gains & earnings on normal contributions may be subject to income tax and 10% penalty.
i) IRA Tax Deductions In a traditional IRA, any contributions you make are tax-deductible and any withdrawals you make will be taxed by the federal government upon withdrawal. However, if you contribute to an SEP IRA, Simple IRA or a Qualified IRA plan, you are considered an 'active participant' and the deductibility of your contributions is determined by your modified adjusted gross income (MAGI). The deductibility of your contributions is also determined by your tax-filing status; whether you are 'married filing separately', 'married filing jointly' or 'single.' If your Traditional IRA contributions are not tax-deductible, you can still contribute towards a traditional IRA. Alternatively, you can contribute towards a Roth IRA, here are the modified adjusted gross income (MAGI) limits.
Note: If your income falls in between the ranges that allow only 'partial contributions', you can use a special formula to determine that partial contribution. Tip: If you are married but have lived away from your spouse for the entire tax year, you are not considered as 'married' for tax filing purposes. Your Roth IRA MAGI limits will be based on single limitations. Note: If you make a non-deductible contribution to your traditional IRA, make sure you fill out IRS Form 8606. This form will help you and the IRS keep track of non-taxable balances in your Traditional IRA, should you make any withdrawals upon retirement. Download IRS form 8606 @ www.irs.gov Split Your Contributions Splitting your contributions between a traditional IRA and a Roth IRA can be beneficial in some cases. These cases are if: i) You are eligible only for partial contributions to a traditional IRA. Instead of contributing the non-tax deductible amount to the traditional IRA (and grow it tax-deferred), contribute it to a Roth IRA where it grows tax-free. ii) You are eligible only for partial contribution to a Roth IRA. To maximize your contributions for the year, contribute the remaining difference to a traditional IRA. Note: Your combined contributions to a Roth IRA and a traditional IRA should NOT exceed stated IRA contribution limits of $5000 for the year 2008.
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401k Articles > Roth
IRA Contribution Limits Trivia > The Truth Behind Hidden Fees in 401k Plans (Part 3) - 401k Videos > Retirement Saving Tips for 55 to 64 Year Olds > The Truth Behind Hidden Fees in 401k Plans (Part 1) - 401k Videos > Tax
Treatment of Roth IRA Distributions Trivia > Small
Business 401k Plans Trivia > Traditional
& Simple 401k / Roth IRA Contribution Limits Trivia > Close Look at 401k Plans - How It Works, Contributions & Distributions > Understand 401k Hardship Withdrawals > Introducing Simple 401k Retirement Plans - Advantages and Disadvantages, Eligibility, Deadlines > Simple IRA versus Simple 401k Plans - Eligibility, Contribution Limits, Further Readings > Understanding the Roth 401k - Introduction, New Rules, Comparisons with Traditional 401k > Tax Treatment of Roth IRA Distributions > Tax Deductions and Credits on IRA (Individual Retirement Account) Contributions Most Frequented Files > 401k 401k Interesting Facts -> Roth 401k is voluntary for employers. In order to offer Roth 401k for their employees, employers have to set up a tracking system that segregates Roth assets from the company's existing plan. This tracking system is expensive to build and maintain, and employers may not choose to do it at all. If so, your employer will not be eligible to offer Roth 401k. -> Upto $10,000 can be withdrawn from a Roth IRA without any penalty if the owner wishes to purchase a home or principal residence. The home must be purchased by either the Roth IRA owner, his spouse, ancestors or descendants. Also, the Roth IRA owner must not have previously owned a home for atleast 24 months. -> Roth 401k Works Best if: - The federal government increases taxes
over time
Other Information -> Link
to this Website |
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Financial
advisors will never advise you to borrow money from your 401(k) retirement
plan, afterall this is the nest egg that you will need when you stop working
upon retirement. Other financial advisors will tell you borrowing
a 401k loan from your own retirement account is more like an act of robbery!
While it is encouraged not to ever borrow from your 401(k), there are
advantages of doing so on the flip side; this is what we will explore
in this article. Infact, according to a study conducted by the Employee
Benefits Research Institute (EBRI), 18% of all 401(k) investors had outstanding
loan balances at the end of 2006. Since 18% is a significant number, there
must be some advantages to borrowing 401(k) loans that these people saw.
Let's look at some advantages of borrowing 401k loans, and how not to
dig a deep hole in your retirement savings. The diagram on the left describes
401(k) loans in a nutshell. In the left side of the diagram, you are borrowing
a loan from your local bank, that gets its funds from investors in the
stock/commodities markets. This money in the stock market ultimately comes
from mutual funds that hold 401(k) retirement money of milllions of employed
Americans. On the right side of the diagram, you are borrowing directly
from your own 401(k) plan thereby eliminating the need for borrowing from
your bank and the financial markets. 
The
New York Stock Exchange, when the funds in your 401k buy or sell stocks,
chances are they trade them here or on another big exchange like the Nasdaq.
Everytime mutual funds do that, brokers charge a fee; it's a legitimate
cost, but the funds don't pay it, you do! And here's why that matters:
Critics say brokerage fees can double the cost of your funds without you
knowing because funds deduct this charge from your returns without sending
your bill. To learn more about hidden brokerage costs, we headed to Bluegrass
country (Lexington, KY) to talk some more with Dr. Greg Kasten, President
of Unified Trust Company whose specialty these days is diagnosing ailing
retirement plans. He has assembled a special database that enables him
to calculate the impact of hidden brokerage fees in mutual funds. 
More
than 78 million baby boomers start surging their way into retirement beginning
2008; the first generation of Americans to retire with 401(k)s. These
are employer sponsored plans that allow workers to invest money without
Uncle Sam taxing it until it's withdrawn. But something has been draining
cash out from these plans. Since the creation of the 401k plan in the
early 80s, all that extra money saved should have been compounding, racking
up these retirement plans and making Americans rich. But instead, the
average 401(k) balance for boomers nearing retirement is only $60,000.
That's not much more than the median household income in the US for 1
year. There are a lot of reasons why 401(k)s are coming up short, like
the stock market's steep decline from its all time high in October 2007.
A less obvious reason, infact a hidden reason are all of the fees that
can take a big chunk out of your investment returns. 
The
purpose of this article is to give you an in depth view of the Roth IRA
with its advantages and disadvantages, income limits & eligibility.
Named after its founder Senator William Roth of Delaware, the Roth IRA
(Individual Retirement Account) was established in 1998 under the Public
Law 105-34. While Traditional IRA may only be limited to where
your corporation invests in, a Roth IRA gives you a wide array of investment
choices; ranging from common stocks, mutual funds, commodities & futures,
certificates of deposit as well as real estate). Here are the contribution
limits of the Roth IRA.
The
benefits of owning a Roth IRA over a 401k are huge. Tax-free growth of
retirement funds, ability to take out qualified distributions, and no
forced minimum required distributions (MRDs) are just some of the benefits.
But did you know that you do not have to have a 401k to convert
to a Roth? You could convert your employer's retirement plan (whatever
it may be) to a Roth via a Roth IRA conversion. This feature is enabled
by the Pension Protection Act of 2006, before which no other plan other
than a 401k was allowed to be converted to a Roth IRA. In this article,
we will explore how you can convert your corporate retirement plan to
a Roth and what rules/provisions you must follow in order to successfully
do this.
401k
plan is a tax-deferred retirement savings plan that most large corporations
and organizations have set up for their employees to help them save for
their retirement. 401k plans originate from a family of defined contribution
plans where both the employer and the employee pay a percentage of their
pay to a savings plan. For example, if the employee saves 10% of his monthly
gross income to a 401k savings plan, the employer might match this with
a 5% contribution. Since both of these are "defined and fixed",
they are known as "defined contribution plans." 401k derives
its name from the Internal Revenue Code - section 401, paragraph (K).
Studies
indicate that many people do not save for retirement because they do not
understand all the 401k gibberish. First there's the traditional 401k,
then there's the Roth 401k, annuities, ROTH IRA, Individual Retirement
Accounts (IRAs) and your savings account at your local bank. Out of all
these options, the Roth IRA has come out to be the best and the most popular
option. Why? Because its tax-free growth and flexibility of making withdrawals
cannot be competed against! Studiessuggest that compared to traditional
401k or 403b plans, a retiree who saves in a Roth IRA will have more savings
upon retirement. Total Roth IRA assets in the United States totalled $178
billion as of December 2006 (Source: Investment Company Institute). 
The
important benefits of contributing towards an IRA are the tax deductions
against annual income, tax-free growth of earnings and the non-refundable
tax credits. You want to maximize the returns you get from contributing
to your IRA, therefore it is essential to know the rules & limits
placed behind these priviledges we just mentioned.