1. How much should I be saving in my 401(k) plan?
2. Should I borrow money from my 401(k) plan?
3. Can I take a "hardship withdrawal" from my 401(k)?
4. What is the difference between a 401(k) and a 403(b) plan?
5. How will signing up for a 401(k)/403(b) plan affect my take-home pay?
6. What is an employer match?
7. What is vesting?
1. How much should I be saving in my 401(k) plan?
Most financial advisors recommend that you aim to save at least 10% of your salary. However, if that sounds too tough, try the 1% solution. You start by saving an amount you can afford, then raise it by one percentage point a year. For example, if you start by saving 2% of your income, the next year save 3%. In the third year save 4%, and so on. You'll soon be saving more than you thought possible. (top)Others call themselves Financial Planners, but they may only be able to recommend that you invest in a narrow range of products, and sometimes products that aren't securities. Before you hire any financial professional, you should know exactly what services you need, what services the professional can deliver, any limitations on what they can recommend, what services you're paying for, how much those services cost, and how the adviser or planner gets paid. (top)
2. Should I borrow money from my 401(k) plan?
A home-equity loan is often cheaper than a 401(k) loan. If you have a significant amount of equity in your house and a good credit record, you will usually be better off taking out a home-equity loan rather than borrowing from your plan. That's because in most cases you can deduct your home-equity interest payments from your income taxes, which dramatically reduces the real cost of the loan. By contrast, interest on a 401(k) is not deductible and IRS penalties may apply. (top)3. Can I take a "hardship withdrawal" from my 401(k)?
If you have no other way of getting the money for certain large expenses, you may be able to withdraw money from your retirement plan. However, restrictions vary by plan. If you need money for the purchase of a primary home, prevention of eviction from or foreclosure on your home, payment of certain medical emergency costs, or college tuition for you or your eligible dependents, you might be able to take money from your 401(k) retirement plan. But such a hardship withdrawal will still be subject to taxes and possible IRS penalties. Your employer may be ultimately responsible for determining whether a certain instance constitutes an emergency. (top)4. What is the difference between a 401(k) and a 403(b) plan?
A 401(k) plan is a type of qualified retirement plan offered to you by your employer under section 401(k) of the Internal Revenue Code. A 403(b) plan is a somewhat different type of retirement plan, which has many of the same features of the 401(k) plan, but is offered only to employees of tax-exempt, non-profit organizations and educational institutions. (top)5. How will signing up for a 401(k)/403(b) plan affect my take-home pay?
Contributing "pre-tax" money to your employer's qualified retirement plan reduces your current taxable income by the amount of salary you defer under the plan. Therefore, you are able to invest more than you otherwise would if you put your money into a comparable after-tax investment. For example, one hundred dollars ($100) invested pretax would "cost" you the same as $72 invested after tax (assuming you are in the 28% tax bracket).6. What is an employer match?
A big advantage of your employer's retirement plan is that your employer may match a portion of the contributions you make to the plan. For example, your employer may make matching contributions of 50 cents for every dollar you contribute. You will also not be taxed on any matching contributions until you receive a distribution or withdraw amounts from the plan. (top)7. What is vesting?
Vesting refers to your right as a participant in a company sponsored retirement plan to receive a present or future retirement benefit that is not contingent on you remaining employed by the employer. You will always be 100% vested in contributions you have made to the plan. Contributions made by your employer, however, will often vest according to a vesting schedule, where your vested percentage will increase based on your years of service with the employer. By law, it can take no longer than seven years of service for you to become 100% vested in any contributions made by your employer, including earnings. Vesting schedules vary from plan to plan. (top)