Answers to Common 401k Questions

Common 401k QuestionsBy Toma Franklin, Staff Writer

You have probably heard the term 401k before, but you may be unsure about how a 401k can benefit you. If this is the case, don't worry, you are not alone. Read on to discover the answers to some of the most frequently asked 401k questions.

Question: How much money should I contribute to my 401k?

Answer: There is actually no clear-cut answer for this, but the smart thing to do is to invest as much as possible in your 401k, and keep in mind that there are caps that limit the amount of money that both you and your employer can contribute. In total, the amount contributed to your 401k in a year cannot exceed $45,000. For employees aged 50 and higher, the total contribution amounts are higher and can vary by company.

Question: Is it possible to borrow money from my 401k?

Answer: Yes, but this is not a decision to be taken lightly. Borrowing from your 401k can have a negative impact on your financial future if you are not able to pay the loan back due to job loss or for other reasons. If, however, you do decide to borrow, you should be allowed to take out about half of the balance that you have already invested.

Question: I have a 401k from my past employer. Should I roll it over to my new employer, or invest in an IRA?

Answer: Invest in an IRA. An IRA should provide you with greater control over your past 401k, since you are free to invest it as you see fit. A smart financial strategy is to keep your old 401k in what is known as a self-directed IRA, meanwhile contributing as much as possible to your new 401k plan. This way, you will be protected for the future even if your new plan does not offer the same benefits as the old one. Just make sure that when you roll over your funds, you do a trustee-to-trustee transfer to avoid the 20% withholding tax.

Question: At what age can I begin to withdraw my 401k funds?

Answer: This can vary from employer-to-employer, but generally speaking, you must be at least sixty years old, unless you permanently leave your job at age 55 or older. If you do permanently retire from your job before the age of sixty (59 ½ in some cases) you can use your 401k money right away, without having to pay the 10% withdrawal penalty commonly levied against those who withdraw before the appointed age.

Your 401k: Your Future

Now that you have the answers to some of the most frequently asked questions about 401k's, you can make informed, future-impacting decisions with confidence. Just keep in mind that 401k plans do vary, so make sure that you discuss all options with your employer and your financial planner.