401(k) Plans

What to Ask An Advisor For your 401k Plan?

              Before hiring an advisor for you 401(k) plan, you should ask them, “How many group retirement plans do you work with?” At Retirement Wealth Partners, we work with numerous retirement plans throughout the Southwest and leverage our experience to help make this benefit fruitful to you and your employees. Contact us if you have any specific questions about your plan and we would be happy to schedule a meeting with you. 

              Below are questions we frequently get from plan sponsors, participants and business owners:

What is a 401k Plan?

              A 401(k) plan is a qualified employer-sponsored retirement plan authorized under Section 401(k) of the Internal Revenue Code. It is designed to help employees save for retirement throughout their working years. A 401(k) plan is considered a defined contribution plan, meaning the retirement benefit ultimately depends on contributions made to the account and the investment performance of those contributions. Unlike a traditional pension plan, which typically provides a defined retirement benefit, a 401(k) plan does not guarantee a specific level of income in retirement. Instead, participants accumulate savings through employee contributions, and in some cases employer contributions, during their working years.

Who Makes up a 401k Plan?

Are 401k contributions tax deductible? 

                One of the primary benefits of a traditional 401(k) plan is that employees can make contributions on a pre-tax basis. In general, pre-tax contributions reduce your current federal taxable income, which may lower your current-year tax liability. The assets in the account grow on a tax-deferred basis, meaning you generally do not pay taxes on investment earnings as they accumulate. When funds are withdrawn from a traditional 401(k), distributions are generally subject to ordinary income tax. If withdrawals are taken before age 59½, they may also be subject to a 10% early withdrawal penalty unless an exception applies.

               However, many 401(k) plans also offer a Roth contribution option. Roth contributions are made with after-tax dollars and do not reduce your current taxable income. The benefit of a Roth account is that qualified withdrawals, including earnings, may be received income tax-free if certain requirements are met, generally including attainment of age 59½ and satisfaction of the applicable 5-year holding period.

                Employer matching contributions can provide an additional benefit by increasing retirement savings. Depending on the provisions of the plan, employer contributions may be made on a pre-tax basis and are generally subject to applicable tax rules when distributed. These tax advantages can make a 401(k) plan a valuable benefit for both employers and employees.

               It is important to note, that Retirement Wealth Partners are not accountants. Please consult your tax preparer to validate any information regarding you tax liability.

Can a 401k be rolled into an iRA? 

             Yes! When you are no longer employed by the company sponsoring your 401(k) plan, you may be eligible to roll over your account balance to an Individual Retirement Account (IRA). To preserve the tax treatment of the assets, pre-tax 401(k) assets are generally rolled into a traditional IRA, while Roth 401(k) assets are generally rolled into a Roth IRA. When completed properly as a direct rollover, the transaction generally does not result in current income taxation. However, specific rules and administrative procedures apply. Before initiating a rollover, it is important to carefully evaluate all available options, as there may be advantages and disadvantages to keeping assets in a former employer's plan, moving them to a new employer's plan, or rolling them to an IRA.

               Call Retirement Wealth Partners so we can help you navigate this process with your 401(k) record keeper and open an IRA for you.

Important Rollover Considerations: Before rolling assets from an employer-sponsored retirement plan to an IRA, investors should consider factors such as fees and expenses, available investment options, services, withdrawal provisions, creditor protections, and required minimum distribution rules. A rollover is not the only available option and may not be appropriate for every investor. Individuals should carefully evaluate their circumstances and consult with appropriate tax and financial professionals before making a rollover decision.

Where should I be to stay on track with my 401(k) account? 

              To shed light on whether you are on track, we’ll have to do the math. There are a few popular formulas you can use: the Rule of 4 Percent, Multiply by 25 Percent Rule, or the Retirement Account Multiple (RAM).

               Fortunately, there are a lot of easy-to-use calculators on this website that will help you get a sense of whether you are on track. You just need to plug in some basic information.

               If you have any specific questions, we are here to help!  Give us a call and we can talk through your savings plan and give some insights on if you are track for retirement.

Who gets my 401(k) account if i die?

                This is a hard question as it can be difficult to think about your own mortality.  However, it is an important topic that is often overlooked.  You can add a primary and contingent beneficiary onto your 401(k) plan to reduce any unintended consequences.  When you invest in a beneficiary-named financial account, such as a 401(k), you should name the individuals or institutions you want to receive the assets in the account when you die.

               These are designated as your primary beneficiaries. A contingent beneficiary is someone or something that receives the benefits of an account if the primary beneficiary can't or won't do so after the account owner's death. Contingent beneficiaries stand in the wings, next in line to inherit assets if something should go wrong. Think of them as a backup plan.

Things to know when designating your 401K Beneficiary:

• Don’t leave the beneficiary form blank! Failing to name a beneficiary is a big mistake because doing so could deprive your heirs or loved ones of inheriting your retirement assets. Another downside is that your retirement assets would go through probate, which is basically the legal process of proving a will, a lengthy, and possibly costly, process which will delay your assets being distributed.
• Don’t designate your estate as the beneficiary. Although it can be, your estate should never be the named beneficiary of a 401(k). To do that, either on purpose or simply by failing to name a beneficiary, means the 401(k) money will be disposed of by probate court, which may also delay the distribution for your heirs for months or even years.
• Beneficiary designations take precedence over wills. Retirement assets are distributed according to the named beneficiary, regardless of other agreements such as wills. So don’t assume if you have a will, that your wishes will be carried out if they don’t jive with the beneficiary form on your 401(k) accounts.
• Keep your beneficiary designations current. Many people fail to update their beneficiary designations after major life events, such as: marriage, divorce, new additions to the family, relationship changes, death to a named beneficiary

Lastly, consult an expert if you aren’t sure who to name as your beneficiary. Experts would include an estate attorney or a tax professional.

401(k) vs IRA

             As you start approaching retirement, we get questions regularly about the difference between a group retirement plan, like a 401(k) and an IRA.  A 401(k) is a group retirement account while an IRA is an Individual Retirement Account.  401(k)s have a higher income limit than IRAs do for Roth contributions. Additionally, the limit of your contributions is much higher in a 401(k) than an IRA.  Meaning you can use a 401(k) to save more for retirement annually than you could in an IRA.  You may have more investment options available through an IRA than in your group retirement plan.

              For these reasons, we like to say that your 401(k) is a great wealth accumulation tool but an IRA may be the better distribution tool. When you roll over your 401(k) account into an IRA you often times gain greater flexibility to distribute what you want, when you want, and how you want.  These distributions of your funds from an IRA may not have a distribution fee or a reduced rate when compared to a 401(k) plan.  This nimbleness allows a payment schedule that can mirror your current pay structure in retirement.

*If you are considering rolling over money from an employer-sponsored plan, you often have the following options: leave the money in the current employer-sponsored plan, move it into a new employer-sponsored plan, roll it over to an IRA, or cash out the account value. Leaving money in a plan may provide special benefits including access to lower-cost investment options; educational services; potential for penalty-free withdrawals; protection from creditors and legal judgments; and the ability to postpone required minimum distributions. If your plan account holds appreciated employer stock, there may be negative tax implications of transferring the stock to an IRA. Whether to roll over your plan account should be discussed with your financial advisor and your tax professional

             If you have any questions about if and when you should roll over your 401(k) into an IRA gives us a call and we can talk with you.