Questions to Ask about Your 401(k)

What Types of Investments Are Included in a 401(k)?

For specific questions regarding your 401(k) account, you would need to contact your employer. However, there are generally two different types of 401(k) accounts:

- Participant-directed plans: You select the types of investments from a list of investment options.

- Trustee-directed plans: A hired trustee decides how funds will be invested.

Participant-directed plans are most common. These allow you to choose the types of investments that are included in your retirement plan. You can choose to be risky or conservative, and you can make changes to these investments. Be aware that there may be a set number of times you can make changes to your account.

How is the Money in a 401(k) Plan Taxed?

Most money that is deposited in 401(k) accounts is done so pre-tax. This means the money is deducted from your pay before it is taxed. You can occasionally choose, though, to contribute post-tax contributions. These contributions are deducted from your pay after taxes have already been taken out.

To avoid early withdrawal penalties, you may need to wait until the age of 59½ before you withdraw any money from your retirement account. It is when you withdraw the money that it is taxed. For pre-tax contributions, taxes are assessed on the total amount when the money is withdrawn. For post-tax contributions, only the interest gained on the money will be taxed at the time of withdrawal.

What Are Some of the Fees Associated With a 401(k) Plan?

Every company has different fees associated with retirement plans. Here is a list of some common fees:

- Plan Administration fees: the services provided by the retirement plan (phone contacts, retirement planning options, etc.)

- Investment fees: the costs for investing your money

- Individual Service fees: specifically charged for special account features

- Sales charges/Loads/Commissions: fees paid to buy and sell shares of stock

- Management fees/Investment Advisory fees/Account Maintenance fees: ongoing maintenance charges for you account

- Other miscellaneous fees

If you are uncertain about the fees associated with your 401(k) plan, begin by referring to your account statement or contact your account administrator. For more specific information regarding 401(k) fees, visit the U.S. Department of Labor Web site.

What Happens to a 401(k) if there is Job Change?

Although every company is different, most companies will give you options regarding your 401(k) plan if you decide to work for another company. Some companies, however, will be adamant regarding their decisions about retirement plans. Here are a few common options:

- Allowing you to keep your 401(k) savings until you reach the age of 59½

- Requiring that you withdraw the money

- Allowing a “Rollover” to a new 401(k) plan with your new company

Realize that if you withdraw the money, you will immediately be subject to tax on the total amount withdrawn. There will also be an early withdrawal penalty of 10%. To avoid these fees, consider rolling over these funds to a retirement account with your new company.

The best way to roll over funds is called direct rollover. This process allows the funds to be moved from your old 401(k) account into your new 401(k) account. A direct rollover may help you avoid any unnecessary penalties.

If your company does not allow a direct rollover, do extensive research about the indirect rollover process. Understand that 20% of the total funds will be immediately withheld (you claim this credit on your next income tax return). However, you will need to deposit the total amount withdrawn from the old 401(k) account into the new 401(k) account within 60 days to avoid further penalties. This will require you to supply the withheld funds.

For more information about rollovers, visit The Citrin Group’s Web site.

Should a Loan Be Taken from a 401(k)?

Your retirement plan is your money. You may take a loan from your account whenever you wish, but there may be a fee involved. You also need to keep in mind that this loan will need to be paid back, with interest.

Loans from your retirement account are beneficial:

- You pay yourself back instead of paying interest to a bank or other financial institution.

- Because you pay interest, you are actually putting more money into the account than was originally there.

- You do not have to undergo a credit check to obtain the loan.