Questions and Answers

What is a 401(k) Plan & how does it work?

A 401(k) is qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pre-tax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis. A 401(k) is a retirement plan, not a savings account. Money placed in a 401(k) is not easy to access in an emergency. Some plans allow loans and hardship withdrawals, but the rules governing them are restrictive.

How will my 401(k) account affect my Social Security Benefits?

Your 401(k) account will have no effect on the amount of Social Security benefits you will be able to receive. However, it is important to realize that Social Security is not intended to provide for your entire retirement, but is meant to serve as a supplement to other income sources. For example, if your current income is $30,000 per year, the benefit you receive from Social Security will be approximately 40% of this, or $12,000 per year. This percentage varies according to your income. If you would like to maintain the same standard of living you had while you were working, you do not want to rely on Social Security to be your only source of income after retirement.

What happens to my account if the company I work for goes bankrupt?

All the contributions made to a 401(k) account are held in trust by a custodian separate from the company sponsoring the plan, meaning that your employer does not have access to any of the money that is contributed to your 401(k). In other words, regardless of whether your employer goes bankrupt or is bought by another company, the vested amount of money in your account is always yours.

How will I be taxed when I withdraw the money?

Under the current Federal tax law, amounts withdrawn from your retirement account will be taxed to you as ordinary income. If allowed, any after-tax contributions you make to your retirement plan would be returned to you free of tax. If you withdraw $10,000 of deferrals and earnings from your account in any year, you must generally include that amount in your income for tax purposes.

Keep in mind that distributions before age 59 ½ , death, or disability are generally subject to a 10% early withdrawal penalty tax, as well as regular income tax. A number of exceptions apply (death, disability or beneficiary distribution of the estate of the plan participant on or after the participant’s death). However, you may be able to avoid immediate taxation by transferring your eligible distribution to a “rollover” individual retirement account (IRA) or a new employer’s retirement plan. That way, you will not owe any taxes until you make withdrawals from the IRA or retirement plan.

What are catch-up Contributions?

Persons age 50 or older may make an additional contribution above any IRS or plan limits. The Catch-up Contribution amount for 2014 is $5,500.

What is the Tax Credit for contributions?

The Tax Credit, or savers credit, is a temporary, non-refundable tax credit for lower income taxpayers who make salary deferrals to 401(k), 403(b), 457, SIMPLE or SEP plans, or regular or Roth IRA. You should consult your tax advisor for more information on this credit.

If I leave my job, do I lose the money I contribute in the plan?

No. You own your contributions and any plan earnings on those contributions. If your employment ends for any reason, the money is yours to take with you.

What are my distribution options if I leave my job?

Maintain your tax-deferred benefits by moving your money into an IRA: An excellent way to preserve the tax-deferred benefits of your investment from your previous employer’s retirement plan is to transfer or “rollover” your money into an IRA.

By moving your money into a Rollover IRA, you may avoid an immediate 20% federal tax withholding. Depending on your tax bracket, other federal taxes may apply when you file your income taxes, as well as additional state or local taxes. In addition, you may pay a 10% IRS penalty if you are under the age of 59 ½ (additional state taxes may apply). By moving your money into a Rollover IRA, you may avoid these tax implications. If you decide to take a lump sum distribution from your retirement plan, are under the age of 59 ½, and you fall within the 28% tax bracket, here is what will happen to your savings balance:

  1. Original account balance: $30,000
  2. 20% immediate Federal tax withholding: -$6,000
  3. 8% additional Federal tax due at filling: -$2,400
  4. 10% IRS penalty for early withdrawal: -$3,000
  5. Remaining balance: $18,600

Not including any additional state penalties or state and local taxes you may have to pay, it would cost you $11,400 to take all your cash out of your prior plan! If you leave it in your previous plan or roll over your $30,000 to your IRA or a new employer plan, you get to avoid paying all those taxes or penalties.

Leave your money in your previous employer’s 401(k) plan: If allowed, you may keep your money in your previous employer’s 401(k) plan. This will help you maintain the tax-deferred benefits of your retirement savings, but you may have less control of your investment choices and may not be able to borrow money from your plan. However, by leaving it in your previous employer’s 401(k) plan, your account balance may be afforded certain protections from creditors that do not apply to Rollover IRAs.

If you choose to leave your account balance in your previous employer’s 401(k) plan, you may roll it over into a Rollover IRA or take a cash lump sum distribution in the future.

Your plan may require you to leave the 401(k) plan upon your termination of employment. Please consult your plans document, or contact your plan administrator, to clarify these provisions.

Transfer your money into your new employer's retirement plan: If your new employer offers a retirement savings plan, you may be eligible to roll over your money into the new plan. There are often different rules and requirements with each plan. If you choose this option, your account balance may maintain its tax-deferred status as well as receive certain protections from creditors. Be sure to consult your new employer for specifics about their retirement plan and how to transfer your account balance from your previous employer.

Take cash from your retirement plan: You may take all of your money out of your retirement plan by taking a lump-sum distribution, but you may lose a substantial amount of your savings in the process. When you take all of your money out of your retirement plan, you lose your tax-deferred investment benefits.

Here is what you can expect if you cash out:

  1. 20% will be immediately withheld for federal taxes.
  2. 10% IRS early withdrawal penalty if you are under the age of 59 ½ (additional state penalties may apply).
  3. Depending on your tax bracket, you may have to pay additional taxes when you file your federal income taxes. For example, if you are in the 28% tax bracket, you will have to pay an additional 8% when you file your federal income taxes (20% was already taken in advance when you cashed out). Additional state and local taxes may also apply. If your tax rate is lower than 20%, you may receive money back from the federal government when you file your annual taxes.
  4. You have lost a source of retirement savings. Your money is no longer earning tax-deferred interest and you have sacrificed part of your long-term investment strategy for short-term gain.

For more information regarding the tax consequences of a lump-sum distribution, you should consider seeking advice from a professional financial or tax advisor.

Is there a limit on how much can be contributed to a 401(k) plan?

Yes. The tax law sets a dollar limit on how much pay you can contribute each year. Many plans also have a percentage limit based on compensation. For example, a plan may limit contributions to 70% of eligible compensation. Please refer to the current annual limits established by the IRS for 401(k) plans.

I lost or forgot my Password. How can I get another one?

Your initial login will be your social security number (SSN) and your password is the last four digits of your SSN, unless you have changed them previously. For assistance obtaining a new password, please contact your plan administrator at 866-687-4015. Upon successful login, you can choose your own password and user ID, and set-up a password reminder.

What is vesting? Am I vested?

Vesting refers to the ownership of your account balance. You are always 100% vested in your contributions to the plan, any earnings on your contributions, and any money you have rolled over into your account from another plan. On the other hand, contributions made by your employer to your account may be subject to a vesting schedule. Vesting in company contributions is based on years of service with the company, which in most cases starts to accumulate on your hire date (not to be confused with your start date in the retirement plan). To see your company's vesting schedule, as well as your specific vesting rules, please see your Summary Plan Description, or speak with Human Resources at your company.

Can I take out a loan from my account balance?

If your retirement plan permits, you may borrow the lesser of 50% of the vested balance or $50,000 minus the highest outstanding loan over the previous 12 months. For more information regarding your plan's loan provisions, contact your plan administrator. Please note that not all retirement plans have a participant loan provision.

What are some of the advantages and disadvantages of borrowing from a retirement plan account?

If you borrow from your own account, you become your own creditor. One potential cost is the loss of tax-deferred interest. You lose the benefit of future compounding when the money is not in your account. Your loan repayment (principal and interest) goes directly back into your plan account. Although you earn the loan interest, paying it directly to your account, you could earn a potentially higher return on the money through your plan's investment choices.

Competitive interest rates are typically 1% over the prime rate. You make your loan payments (principal and interest) with after-tax dollars. When you retire and take distributions out of your plan, the interest you have paid on the loan will be taxed again.

Because it is a loan and not a distribution, you do not incur federal or state taxes upon receiving the loan funds. However, if you default on the repayment you will be taxed on any unpaid loan balance as a distribution. If you stop making loan repayments, the outstanding loan balance is considered a distribution and will be subject to federal and possibly state income tax. In addition, you may also be subject to an IRS 10% early withdrawal penalty if you are under 59½ years old.

Repayments are easy and convenient through payroll deductions. Depending on the amount of your loan repayments, they may affect your ability to continue participating in the plan at the same contribution percentage. You select the term of your loan, usually between one and five years. Loans taken for the purchase of a principal residence may allow longer repayment terms.

How do I repay my loan and can I repay it early?

Loan payments are due each pay period via payroll deduction. The payroll frequency may be weekly, bi-weekly, or monthly. An amortization schedule will be sent to you when you take out the loan so that you will be aware of your payment amount and frequency.

You may repay your loan in full at any time. However, you may not make partial re-payments. To pay your loan in full, please contact your plan administrator or Swerdlin for the mailing address and loan payoff instructions.

Can I take more than one loan at a time?

If your plan permits loans, it may limit the number of loans a participant may have outstanding at any given time. Please check with the plan administrator at your company for more information.

How do I make a hardship withdrawal?

If your plan permits hardship withdrawals, contact our call center at 866-687-4015 to begin the process. In order to be eligible for a hardship withdrawal, the purpose of your withdrawal must fit one of these distinct categories defined by the IRS:

  • Costs related to the purchase (not mortgage payments) of a primary residence
  • To prevent eviction from or foreclosure on a primary residence
  • Post-secondary education expenses for self, spouse, or a dependent
  • Un-reimbursed medical expenses for you, your spouse, or other dependents
  • Funeral or burial expenses
  • Repair of damage to principal residence for casualty loss

Aside from these strict IRS guidelines, your plan may also have other qualifying provisions. Please check with the plan administrator at your company to see if you are eligible to take a hardship withdrawal.

What are the taxes and penalties associated with hardship withdrawal?

If you take a hardship withdrawal, you must pay federal taxes and applicable state taxes on the amount of the distribution taken. You may also be subject to a 10% early withdrawal federal tax penalty, in addition to a state income tax penalty if you are under age 59 ½. You will also not be permitted to contribute for six months following the distribution and the limit on your deferrals in the tax year after you receive the hardship distribution will be reduced by the deferrals you made in the tax year you received the distribution.

What is the maximum amount that I can contribute to the plan?

The IRS defined maximum dollar amount a participant may contribute to a retirement plan for the year 2014 is $17,500. You may also be eligible to contribute an additional "catch-up contribution" of $5,500 if you are over age 50 (if allowed by your plan). Your employer may also contribute to your retirement plan account. The total annual contribution, including employer contributions, but excluding catch-up contributions, cannot exceed $52,000 or 100% of total compensation, whichever is less. The contribution and catch-up limits generally increase by $500 each year.

What happens to my retirement account if I die?

A distribution is paid to your designated beneficiaries. If there are no beneficiaries listed, the distribution will be paid to your spouse, children, or estate, depending on the plan provisions and state law.

If I am a beneficiary and the participant has passed away, what do I need to do?

You will need to contact the plan administrator at the participant's company and request a death distribution from the account.

How do I choose the investments in which to invest my money?

Many factors need to be considered when you are choosing your investment allocation. Two of the most important factors that need to be taken into account are how long you have until retirement and your personal risk tolerance. If you have many years until retirement (more than ten years is a good benchmark for some, but 20 or more years is even safer), then you can often afford to take more risk in your investments. However, you do not want to be uncomfortable with your choices, so you must find the perfect mix of investments for you personally. Reading a fund's prospectus or speaking with an investment advisor are just two examples of resources that may help you in this decision. You can also complete the risk assessment questionnaire available in our enrollment booklets. Do not forget you can always change your investment allocation if you find that your first choice is not working for you.

How often should I change my investment choices?

There is no uniform answer to this question. It is really a matter of preference. Some people will review their investment choices when they get their statements, while other may only look at them once a year. However you choose to monitor your investment choices, make sure you have a strategy in mind. If a life event causes your strategy or goals to change, then that is probably a good time to make sure your investment choices are in line with your new goals.

What types of risk will my money be exposed to?

Your account will be exposed to a variety of types of risk depending upon how you choose to allocate your funds between investments. Investing in stocks, for example, exposes you to the everyday volatility of the market, but long-term they often tend to have the highest potential for gains. If you choose to invest in foreign stock, you run the risk of political turmoil or exchange rates changes affecting your return on investment. If you invest in bonds, there is a chance that interest rates drop, and the possibility that inflation may be higher than the return a bond fund offers, meaning that you are actually losing money. There is no way to escape the risk that your investments will decrease in value, although some types of investments are seen as "less risky" and others as "more risky". Bonds, for example, are seen as less risky when compared to stocks. However, generally speaking, the higher the risk the higher your potential for greater gains. While it is impossible to completely avoid risk, there are certain things you can do to decrease your chances for losses in your account. Most importantly, avoid putting all of your money into one fund, or one type of fund. Spread your assets among a variety of funds within your plan so that if one fund is not doing well, you have a chance for your other investments to make up for any losses. Bear in mind that everyone has a different tolerance for risk and the closer you are to retirement, the more closely you may want to guard your amount of risk exposure.

How often will I receive my account statements?

You will receive an account statement after the end of each plan quarter. For any questions regarding your statements, contact the plan administrator at your company or Swerdlin & Company.

I am no longer employed with the company and need to access my money. How can I take my money out?

If you have more than $5,000 in your account, you may leave your money in the plan. If your balance is $5,000 or less you may be required to take a distribution.  Contact the plan administrator at your previous employer or our call center 866-687-4015 for more information about your distribution options and to obtain the necessary forms to withdraw your money from the plan.

Where can I obtain my account balance?

You may login to your account directly from here, or click on the Account Login link at the top right of the page, then select participant. Enter your unique user ID and password and you are automatically taken to the account summary page, which contains your account balance and other pertinent information about you. You can also check your balance by calling us at 866-687-4015.

Learn more about Swerdlin

Featured page thumbnail

Why Swerdlin?

Although we have clients nationwide, we're still a family company at heart. 

Featured page thumbnail

Our Services

Swerdlin provides services for all types of retirement and cafeteria plans to clients nationwide. Learn how we can help you!

Featured page thumbnail

Resources

Click here for our collection of forms, calculators, useful links, and frequently asked questions.

Featured page thumbnail

Our Values

Balance. Integrity. Relationships. Development. 

Why Swerdlin?

Although we have clients nationwide, we're still a family company at heart. 

Our Services

Swerdlin provides services for all types of retirement and cafeteria plans to clients nationwide. Learn how we can help you!

Resources

Click here for our collection of forms, calculators, useful links, and frequently asked questions.

Our Values

Balance. Integrity. Relationships. Development.