Starting a new job? Good for you! If your company offers you a 401(k) plan, you may have some important decisions to make. If you don’t know the answers to these 10 key questions, check your plan documents. Or ask your HR representative or plan administrator. Making a few smart moves today can help put you on the path to your retirement goals.
Your 401(k): 10 things to find out
When can I start contributing?
Not every 401(k) plan allows new employees to begin contributing right away. Some companies might make you wait two, three or even 12 months after you’re hired. Your plan administrator can tell you whether a waiting period applies.
Will I be enrolled automatically?
An increasing number of companies automatically enroll you in a 401(k) when you join the company or first become eligible. Automatic enrollment is designed to encourage you to save by taking all the effort out of signing up. Ask your HR representative whether this is the case at your company, because if you’re automatically enrolled, you participate unless you specifically opt out.
Is there a company match, and if so, what are the rules?
Many employers offer incentives for employees to contribute to their 401(k) plans by matching contributions up to a certain point. For instance, some companies may match every dollar you contribute with 50 cents of their own, up to a certain percentage of your salary. That’s a nice benefit you don’t want to miss out on. But individual plans vary widely, and there may be restrictions on qualifying for the company match or vesting schedules for the match. Ask your plan administrator for the rules that apply to your company’s plan.
How much can I contribute to my 401(k)?
The IRS sets a contribution limit each year. In 2022 you can contribute up to $20,500 (up to $27,000 if you will be 50 or older at any time during the calendar year), as long as your contribution doesn’t exceed your earned income for the year. (Employer contributions don’t count toward that limit.) You can stay current with contribution limits at irs.gov.
Can I sign up for automatic increases to my contribution?
One of the easiest ways to contribute more is to make the process automatic. Some 401(k) plans allow you to specify periodic, automatic contribution increases, and some employers automatically enroll employees in auto-escalation plans. Ask your plan administrator whether your plan offers automatic increases so you’re prepared for them.
What investment options does the plan offer?
401(k) plans offer investment options chosen by the plan. Having choices allows you to find investments that make sense for you. Remember, though, that investments carry different levels of risk, including potential loss of principal, and no guarantee of return, so you may want to seek advice from a professional.
Is there a Roth 401(k) option?
Some plans allow you to contribute to both traditional and Roth 401(k)s. A traditional 401(k) offers you a tax break now by letting you contribute pre-tax money. But when you withdraw the money, that amount may be taxable. Roth 401(k)s work in reverse: You contribute after-tax dollars but when you withdraw the money in retirement that amount generally isn't taxable. Putting some contributions into a Roth 401(k) may benefit you if you expect to be in a higher tax bracket in retirement. State and local taxation rules may vary. A tax professional can help you figure this out.
What are the maintenance costs and fees?
Most 401(k) plans have certain fees and expenses, which can vary and can reduce your overall return. Some fees cover administrative costs associated with running the plan. Others cover the cost of managing the particular investment vehicles you choose.
What happens if I withdraw the money early?
According to IRS rules, typically if you withdraw money from your 401(k) before age 59½, you may be subject to income tax, including an additional 10 percent federal tax, on such amount. (There are a few exceptions; see the IRS website for details.) But some plans allow you to borrow from your account. Those loans often involve fees and, as with any loan, you have to pay interest—though in this case, generally you’re paying yourself. You don’t have to pay the early-withdrawal additional tax if you repay the loan within the designated period.
What happens to my money if I leave the company?
You generally can take a distribution of your account balance once you leave your company. You may be able to roll your money to an individual retirement account (IRA) or into a new employer sponsored retirement plan. Or you could cash out via a distribution, though additional taxes may apply. Knowing the rules helps you avoid surprises and develop the best plan. Each choice may offer different investment options and services, fees, expenses and rules. These are complex choices, so take time to compare options.
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Bank of America and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.