What is a 401(k)?
Most large employers now offer their employees a 401(k) retirement plan, sometimes called a "salary-reduction" plan. Typically, the employer sets up the plan with an investment company, an insurance company or a bank trust department. You, the employee, agree to put part of your salary into a special savings and investment account. Most 401(k) plans offer a variety of investment vehicles, from individual stocks or mutual funds to money market accounts. Importantly, the money you invest isn’t counted as income when you complete your annual tax return. Earnings that accumulate in the account are not taxed until you start making withdrawals, usually after you reach age 59 1/2. If you withdraw earlier, you’ll have to pay taxes on the money and a stiff 10% penalty. Most companies that offer 401(k) plans also match employee contributions. For example, the company might add 50 cents to the account for every dollar contributed by the employee. That makes a 401(k) plan a much better vehicle for retirement savings than an individual retirement account, which does not involve a matching contribution from your employer.

How is a 401(k) different from a regular pension?
The biggest difference between a 401(k) and a "regular pension" is that a 401(k) gives you much more control over your retirement nest egg. A 401(k) is funded with your own money and, in some cases, by a contribution from your employer as well. You decide how much to save and how to invest. A traditional, "regular" pension is funded and controlled by your employer.There are two types of pension plans: defined contribution (where the employer contributes a percentage of compensation determined by the formula in the plan document)and defined benefit. A "defined benefit plan" promises to pay you a specific monthly income in retirement -- in other words, a defined benefit. What you get when you retire will be based on your salary and the number of years you worked for the company. The company must put aside enough money each year to fulfill this promise but occasionally -- as some workers have unfortunately discovered -- it’s a promise that the employer may not be able to keep. Sometimes employers go bankrupt. Most pension plans are covered by the Pension Benefit Guarantee Corp., which guarantees benefits to workers even if a firm is liquidated in bankruptcy. There are some plans that are not covered, however, such as those offered by professional service firms (such as doctors and lawyers) with fewer than 26 employees, by church groups or by federal, state or local governments.

How is a 401(k) different from a profit-sharing plan?
Technically, 401(k) plans are considered profit-sharing plans. But on a practical level, they’re usually different in several ways from the classic profit-sharing plan. In a profit-sharing plan, the employer makes contributions for eligible employees whether or not they also contribute to the plan. However, In a 401(k) plan eligible employees can choose to participate or not. If they choose to participate, they make their contributions pre-tax through a salary deferral agreement with the employer. Their deferral may or may not be matched by the employer. Since it is a type of profit sharing plan the employer can also make profit sharing contributions to the plan. These contributions (also called non-elective contributions) are allocated to all eligible employees whether they contribute to the plan through deferrals or not.

How long do I have to wait after being hired to join the 401(k) plan?
Some companies allow workers to join their 401(k) plans immediately. But other companies utilize a federal law that allows firm to wait until a worker has logged at least one year of service before joining the plan. The reason: Many employees quit before their first year is up, and companies want to avoid the administrative costs involved in setting up a 401(k) for a worker who might not stay very long. A company is also allowed to exclude anyone under the age of 21. In part, that’s because younger employees often don’t take advantage of the plans even when they are eligible (even though they should). If younger workers are eligible to join the plan but don’t, their lower participation rate can reduce the amount that other employees are permitted to contribute because of federal rules.

What happens to the money I put into the 401(k) plan?
The money you put into a 401(k) plan is invested according to the choices you’ve made from a list of options offered by your employer. These options typically include stock and bond mutual funds, money market funds, a guaranteed investment contract (GIC) that pays a fixed interest rate and your company’s stock.

What information about my 401(k) plan am I legally entitled to have?
The federal government requires companies to provide only minimal information to workers who take part in a 401(k) plan. Technically, all you’re entitled to is a summary of how the plan works, a summary annual report and an annual statement. If the plan allows you to invest in the company’s stock, you are also entitled to receive a prospectus or similar document. Fortunately, many companies provide far more, and you can also do your own research. Employers are strongly motivated to provide employees with all the information they need to use the plan wisely.

What recourse do I have if my employer and I disagree about my 401(k) account?
Most questions or problems concerning a 401(k) can be cleared up quickly and amicably with a phone call or a letter. But major disagreements must usually be solved through a more formal process. Your employer is required by law to include a claims review process in which you can file a written claim with the plan administrator. That’s the person or committee responsible for handling the day-to-day administration of the plan. The plan administrator must respond to participant questions and give an explanation for any denial of benefits. If you don’t find the explanation acceptable, you can request a review of the matter. If you’re still not satisfied, you should seek outside support from an attorney and/or the Department of Labor.

How do I know how well my 401(k) investments are doing?
If you have invested in a 401(k) retirement plan, it’s important to stay abreast of how your investment is faring. At a minimum, the company that administers your plan will provide an annual statement that shows the amounts you have contributed and how those investments have performed. Many plans report on a semi-annual or quarterly basis, and some even issue monthly updates. Of course, you can probably get a pretty good handle on how your 401(k) retirement portfolio is doing on a daily or weekly basis by checking this site or the business section of your local newspaper. You can also read publications such as The Wall Street Journal or Barron’s. If the bulk of your portfolio is in mutual funds or your company’s stock, for instance, those publications can tell you how much their value has changed over the course of a given day or week.

Do employers guarantee 401(k) accounts?
Employers never guarantee 401(k) accounts. They are instead considered "fiduciaries" of 401(k) plans, which means they are legally responsible for supervising-not guaranteeing-the money you invest. This supervisory relationship obligates the employer to protect your financial interests by choosing reputable and competent plan trustees, administrators and investment managers and continuously monitoring their performance of their duties. If employers choose to follow the voluntary 404(c) regulations established by the Department of Labor, they must give plan participants at least three distinctly different investment choices, each of which has a different level of risk. You must also be given the opportunity to move your money among these investments at least quarterly, and sufficient information to make sensible, informed investment decisions. But your employer doesn’t offer you protection against any investment losses you may suffer.

Does the government guarantee my 401(k) account?
Although most traditional pension plans are insured by the federal government, there is no such guarantee for 401(k) accounts. Traditional pension plans are insured by the federal Pension Benefit Guaranty Corp. because the government wants to ensure that the payments a company promises its retirees will indeed be made. But 401(k)s do not involve a promise of future benefits. The value of your account will rise and fall over the course of the years, and you could theoretically be wiped out if your investments perform badly. If it helps you sleep better, you may want to know that one of the duties of the federal Pension and Welfare Benefits Administration is to ensure that all employers and 401(k) trustees follow government requirements. That’s not as good as a guarantee, but it’s better than nothing.

What happens to my 401(k) account when I retire?
If you have a 401(k) and retire, you will likely have four choices(assuming you are over 59 1/2). Those choices will be: 1. Taking the money in a lump sum. If you do, you’ll owe income taxes on all of it. The disadvantage is that after you’ve taken the lump-sum distribution, your money is no longer in a tax-deferred retirement account. That means that the only way to avoid tax on any future earnings is to invest it in tax-exempt instruments. 2. Rolling your entire balance into an IRA. Then you can take out money as you need it, paying income taxes only on the amount you withdraw. This gives you more flexibility than any other option. Most of your money will continue to be sheltered in a tax-deferred account. You’ll have a nearly unlimited choice of investments, too. 3. Taking a 401(k) payout as a lifetime annuity. Not all plans offer this. An annuity pays a monthly benefit for your lifetime alone or, if you choose a joint-and-survivor annuity, for your lifetime and your spouse’s. The advantage of an annuity is that it provides a guaranteed lifetime benefit. The disadvantage is that, because it’s a fixed amount, its purchasing power will be reduced every year by inflation. 4. Leaving some or all of the money in your 401(k). You must have at least $5,000 in your account to do this. This choice makes little sense, however, since, if you like the investments available in the plan, you can use those same investments in your own IRA and completely control you access to your money. If you leave it with the plan, you’ll need to comply with the plan administrator’s rules and proceedures for making withdrawals or changing investments.

What happens to my 401(k) account when I die?
When you sign up for a 401(k)account, a first task is to designate a beneficiary who will receive the money in your account when you die. If you somehow failed to designate a beneficiary, your estate will automatically become the beneficiary. If your beneficiary is your spouse, he or she will have most of the same options with the money that you would have if you were leaving the company to take another job. Your spouse could roll the money over into an Individual Retirement Account (IRA), or withdraw it all and pay income taxes on it. If your spouse decides to roll the money over into an IRA, the rollover should be direct from the employer to the IRA account. This prevents deduction of any withholding tax. If your survivor decides to withdraw the cash and pay the taxes, the Internal Revenue Service will waive its early withdrawal penalty regardless of the spouse’s age. Importantly, though, your spouse will probably not have the right to keep the money invested in the same 401(k) plan. Even more restrictions would be placed on your beneficiary if the beneficiary is not your spouse. For example, the beneficiary couldn’t roll the money over into an IRA. Most plans provide for full vesting when you die, so any matching contributions made by your employer would likely be included in the distribution to your beneficiary.

What happens to my 401(k) account if I’m disabled?
If you are completely disabled and cannot work, you can tap your 401(k) plan without being charged a 10% penalty regardless of your age. However, you will owe ordinary income taxes on the money you withdraw. If you’re disabled, you may also be able to take out any matching contributions your employer made even if you haven’t completed the years of service normally required for vesting. Most plans provide for full vesting whenever a participant becomes disabled. But each plan has its own definition of what’s required to qualify for disability. Ask your human resources or personnel department about your plan’s rules. If your plan does provide full vesting for disabled employees and your employment is terminated as a result of a qualifying disability, you’ll receive your vested account balance-your contributions and your employer’s contributions and what they earned. If your plan doesn’t have a disability feature, or if you don’t meet the plan’s definition of disability, your distributions from the plan will be processed the same as those of other former employees.

Does participating in a 401(k) affect any of my other benefits?
Participating in a 401(k) plan probably won’t affect any of the other benefits your employer offers, as long as you make sure the amount you contribute is added back to your salary for the purpose of calculating those other benefits. If you earn $40,000 a year, for example, and contribute $2,000 to the 401(k) plan, your taxable income is reduced to $38,000. That means that if your group life insurance covers you for twice your salary, you’ll have only $76,000 of coverage-unless the 401(k) contribution is included in the calculation. Talk to your human resources or personnel department about it.

If I’m saving money that I plan to use before I retire, does it make sense to do it with after-tax 401(k) contributions?
If you’re saving money that you plan to use before you retire, it’s usually better to save it outside your 401(k) plan. It’s true that usually you can withdraw your after-tax 401(k) contributions at any time without taxes or penalty, but remember, you’ll owe taxes on any interest they earned, as well as a 10% early withdrawal penalty if you’re under age 59 1/2. The 10% penalty is an expense you wouldn’t have if you saved on an after-tax basis outside your 401(k) plan. But there are situations where it can make sense to use after-tax contributions for short-term savings: if your employer matches your after-tax contributions and if you’re fully vested in the matching contributions by the time you withdraw the money, you may wind up with more money by saving in the 401(k) plan, even after taking the 10% early withdrawal penalty into account.

Can I invest in both my company’s 401(k) plan and an Individual Retirement Account?
You can invest in a 401(k) plan and an Individual Retirement Account (IRA). However, depending on your salary, the money you contribute to your IRA might not be tax-deductible.

If I decide not to participate in my 401(k) plan, will I be eligible for a fully deductible IRA?
If you decide not to participate in a 401(k) plan that’s offered by your employer, you are still eligible for a fully deductible Individual Retirement Account (IRA) regardless of your salary as long as you do not actively participate in any qualified plan. If your spouse is an active participant and your combined AGI is$160,000 or more you cannot deduct your IRA contribution, even if you are not an active participant.

If I have to choose between a 401(k) and IRA, which choice makes more sense?
If you have to choose between participating in a 401(k) or contributing to an Individual Retirement Account (IRA), a 401(k) is almost always the best choice. This decision is truly a no-brainer if your IRA contributions aren’t tax deductible and/or your employer provides a matching contribution to your 401(k) plan. A 401(k) with an employer’s match is a much better deal than an IRA that has no matching contribution and won’t reduce your current income tax bill. In fact, unless you’re uncomfortable with the 401(k) plan’s investment options, it’s a better deal even if you don’t have an employer match and your IRA contributions are fully tax-deductible.

What will happen to the money I have in my 401(k) retirement plan when I leave my current employer?
Many workers participate in 401(k) and similar retirement plans that are sponsored by their employers. If the worker leaves the company, the money can either be rolled over into a 401(k) offered by the new employer (assuming the new company offers such a plan) or rolled over into an individual retirement account. Either way, the worker can avoid paying taxes and penalties on the money as long as it is rolled over directly from the old plan either to a new employer-sponsored plan or to an individual retirement account.

If I change jobs, can I leave my money invested in my current employer’s 401(k) plan until I retire?
If you have a 401(k) with your current employer but eventually change jobs, you may be able to leave your 401(k) with your old employer until you retire. Your ability to do so will be based on the size of your vested account balance. If you have more than $5,000 in the plan and you’re under age 65 (or in some cases 62), you have the legal right to leave it where it is. But if your vested balance is less than $5,000, your employer has the right to pay it to you whether you want it or not. You get to choose how to take that distribution, however. It can be made directly to you, to another employer’s 401(k) plan or to a rollover IRA. Do not have the money paid directly to you. Ask your employer to have it transferred directly to another employer’s 401(k) plan or to a rollover IRA. If you’ve made after-tax 401(k) contributions, those contributions can’t be rolled over into an IRA. Ask your employer to return directly to you any after-tax contributions you made to the plan. You won’t owe any tax on this money because you’ve already paid it. But you can and should roll the interest earned by your after-tax contributions into an IRA along with your pre-tax contributions and earnings, and your employer’s matching contributions and their earnings.

If I change jobs, but I decide to leave my 401(k) account at my former company, can I keep putting money into it?
If you change jobs but decide to leave your 401(k) with your previous employer, you won’t be allowed to make any further contributions to the plan. You can only make pre-tax 401(k) contributions from the salary paid by the plan sponsor. Technically, you participate in the plan by authorizing your employer to take a specific amount out of your compensation and put it into your 401(k) account. In fact, 401(k) plans used to be called salary reduction plans for that very reason.

Can I roll a 401(k) account from my previous job into the plan I have now?
If you recently started working for a new employer that offers its own 401(k), you might be able to roll the old account you had with your previous employer into the new one. Some plans allow you to do this and some plans don’t. Assuming your current 401(k) plan does accept rollovers from other plans, the money must be transferred into the plan directly from your previous employer’s 401(k) plan or from a rollover Individual Retirement Account. Remember, if this money has passed through any type of account other than a 401(k) plan or a rollover IRA (containing only qualified plan distributions), it’s tainted as far as the Internal Revenue Service is concerned. That means it can’t be put back into a 401(k) plan.

What happens to my 401(k) account if I’m fired?
If you are fired, the money you have in your company’s 401(k) will be treated just as if you had resigned. If your vested balance exceeds $5,000, you would have the option of leaving the money in the plan even though you may have left the company under less-than-ideal circumstances.

What happens to my 401(k) if my employer is acquired by another company?
If you have a 401(k) and your employer is acquired by another company, one of several things could happen. 1. If the buyer has other business units that are covered by a single 401(k) plan, your company could be required to join the same plan. After the sale is made final, your new 401(k) contributions may have to go into the new company’s plan, and account balances in the old plan probably will be transferred to the new one. 2. If the buyer prefers to have each of its business units maintain their own benefit program, your old 401(k) plan might be retained with little or no change. 3. The new owner could decide to terminate your 401(k) plan, especially if its other business units don’t offer a plan of their own. If that’s the case, you could preserve the tax-deferred status of your account by having the current 401(k) plan administrator transfer your money directly into a rollover Individual Retirement Account (IRA).

What happens to my 401(k) if my employer goes out of business?
If you have a 401(k) account and your employer goes out of business, don’t worry. The assets in your account will be safe. As plan fiduciaries, employers are legally required to put 401(k) money into a separate trust account or into a contract with an insurance company within a reasonable amount of time after it has been deducted from their employees’ salaries. A trust is a separate legal entity from the company and will continue to exist even if the company goes out of business. The plan trustees are responsible for managing the money in the plan until all benefits have been paid to the participants. The money in the trust is invested in the different investment choices that are offered by the plan as the participants direct; but no matter how many different investments the plan offers, the money is still in a trust. Your employer’s creditors have no legal claim to these funds.

An IRA seems safer than a 401(k) plan. Can I switch my money from my 401(k) into an IRA?
An Individual Retirement Account (IRA) isn’t really any safer than a 401(k) plan. In addition, a 401(k) plan provides several benefits that IRAs do not. You can contribute an amount that’s much higher than what you can put in an IRA. Your 401(k) contribution also reduces your current taxes. Depending on what you earn, an IRA contribution might not do that. That said, the only way you can switch money from your 401(k) into an IRA is if you are getting a 401(k) distribution. That won’t happen unless you are leaving your job.

When I change jobs, how do I decide whether to leave my money in the company plan or switch it to an IRA?
If you have been participating in a company-sponsored retirement plan and decide to change jobs and you have at least $5,000, you can usually either leave your money in the company plan or roll it over into an Individual Retirement Account (IRA). Each choice has its advantages and disadvantages. By moving former plan funds to an IRA, you are taking on the full responsibility of investing your funds -- or at least the responsibility of choosing money managers and monitoring their performance. You must also consider security. An IRA does not always enjoy the protection against creditors that is implicit in a qualified plan’s ERISA protection. State law defines the creditor protection given to IRAs.When faced with the decision "to roll or not to roll," your best bet is to meet with a financial planner who will help you clarify your objectives and guide you through the complexities of making this important investment decision. The more you know about your alternatives, the more comfortable you will be with your final decision.

Is there a dollar limit on how much 401(k) money I can transfer to an IRA?
There’s no dollar limit on the amount of money you can have transferred from a 401(k) plan to a rollover individual retirement account. You can roll your entire 401(k) balance into the IRA, provided it contains no after-tax contributions. If your 401(k) contains some after-tax contributions, you’ll have to take those contributions as a distribution. However, since you have already paid taxes on the money, you won’t have to pay taxes on them again. Good news! After 2001, the new Economic Growth and Tax Relief Reconciliation Act of 2001(fondly dubbed EGTRR 2001 by those in the know) allows you to roll over the after-tax contributions also.

If I roll my 401(k) money into a rollover IRA, what are the distribution requirements?
If you roll your 401(k) money into a traditional Individual Retirement Account, you will have to start taking money out of the rollover IRA no later than April 1 of the year after you turn 70 1/2. In other words, if you turned 70 1/2 in 2001, you would have to take your first distribution by April 1, 2002. However,this rule will not apply to your employer sponsored retirement plan accounts if you are still employed and do not own more than 5% of the company. IRAs must begin distribution even if your are not retired. (Rolling over into a Roth IRA requires you to pay taxes on the amount that you roll over, but there are no deadlines for taking distributions.) The minimum you will have to withdraw depends on your life expectancy, which is determined by life expectancy tables published by the Internal Revenue Service. However, you can use the tables in one of two ways: You can calculate your minimum required distribution by dividing your account balance by the number of years remaining in your life expectancy, or by using your joint life expectancy with your spouse. It’s worth doing the calculation both ways to see which is better for you. You come up with very different mandatory withdrawal amounts depending on whether you use one life expectancy or two. You must pay taxes on these mandatory distributions; you can’t roll them into an IRA.

Can't I just have a check made out to me for the amount of my 401(k), and then deposit it in a rollover IRA within 60 days?
If you leave your job and decide that you don't want to leave your 401(k) plan there, the best and easiest way to transfer the money is to have the proceeds transferred into a rollover Individual Retirement Account (IRA). Many stock brokerage firms, mutual fund companies and other financial institutions offer rollover accounts and will handle nearly all of the paper work for you. The trustee of your old 401(k) plan will simply write out a check payable to the trustee of the rollover IRA. Technically, you can have your old employer's 401(k) plan deliver a check directly to you and still have up to 60 days to deposit the money in a rollover IRA. But if you do, your 401(k) distribution will be subject to a mandatory 20% withholding tax. This means that if your 401(k) account is worth $100,000, you'll get a check for $80,000. The tax is withheld just in case you change your mind about opening that IRA account. If you really do deposit $100,000 in an IRA within sixty days, then the $20,000 that was withheld will be refunded to you by April or May of the following year. But in the meantime, you face a classic Catch-22 dilemma. How can you deposit $100,000, when all you received from your 401(k) plan is $80,000? Unless you happen to have a spare $20,000 lying around that you can add to your IRA deposit, you're going to be taxed exactly as if you had taken a $20,000 withdrawal. In other words, if you deposit only the $80,000 you received in the IRA, the government will add $20,000 to your taxable income for the year. The upshot is that you don't get a $20,000 refund. If you're in the 28% bracket, you get back only $14,400. If you're under age 59 1/2, you'll also owe a 10% early withdrawal penalty, so you get back only $12,400. The bottom line: If you're leaving your job, don't do anything with the money in your 401(k) plan until you have opened a rollover IRA. Then have your 401(k) plan administrator do a direct, trustee-to-trustee transfer into your new account.

How do I contribute to a 401(k) plan?
If you are covered by a 401(k) retirement plan, you won’t write a check out every year in order to fund the account. Instead, part of your contribution will be taken right out of each of your regular paychecks and deposited in the 401(k). Money taken out of your check to fund the account is deducted on a pre-tax basis. The company won’t report the money as income on your W-2, which will lower the taxes you must pay. In addition, money in the 401(k) will grow tax-free until you begin making withdrawals, usually after you reach age 59 1/2.

Are my 401(k) contributions deducted as a percentage of all the pay I receive, including bonuses and overtime?
Workers who are eligible for bonuses and overtime often wonder if their 401(k) contributions will be deducted from all the pay the receive or simply from their "straight" salary base. There is no consistent answer because the rules are set by each employer.

What’s the minimum I can put in my 401(k)?
While the government places a limit on the maximum amount you can contribute to a 401(k) retirement plan every year, it does not set a minimum. This flexibility allows you to make the maximum contribution in years when you have extra cash and cut back in years when your budget is tight.

Who picks the investment manager for my company’s 401(k) plan?
Every 401(k) plan has a plan trustee who is legally responsible for choosing the company (or companies) that will invest the money contributed to the 401(k) program. Federal law requires that this choice be based solely on the "best interest" of the plan participants-you and your fellow workers. The trustee is also responsible for monitoring the investment managers’ performance.

Who picks the 401(k) plan investments?
Technically, the employer who provides a 401(k) plan is responsible for deciding which type of investments the plan will offer. However, employers rarely make this decision by themselves. Instead, they get help from a professional firm that specializes in 401(k) plans. Once your employer decides which types of investments the 401(k) should offer, you get to choose how you want your own contributions allocated.

How many investment options must be offered in a 401(k) plan?
Technically, there is no minimum or maximum number of investment options that an employer must offer in its 401(k) plan. It may offer just one or two investment choices, or more than a dozen. If you don’t like those choices, you can ask the company to expand its selections. Or, you can set up an Individual Retirement Account (IRA) or similar plan to start building a nest egg yourself. The U.S. Department of Labor has established a list of voluntary guidelines, commonly called 404(c) regulations, that encourage employers to offer at least three different investment choices in their 401(k)s. The key word here is voluntary. Employers are not legally required to follow these guidelines, or even offer a 401(k) at all.

How often can I switch money among investments in my 401(k)?
How often you can switch among 401(k) investments is determined by the rules that govern your company’s plan. Most plans allow switching either once a month, once a quarter or twice a year. A few plans allow switching daily, and others only once a year. There’s no legal requirement your employer must follow when determining how often switches can be made.

Do I get to decide how to invest all the money in my 401(k) account?
You always get to decide how your own contributions to a 401(k) are invested. The only restriction is that the money must be placed in the group of investments that your employer has decided to offer. Most 401(k)s offer several investment options, including a variety of mutual funds and, quite often, guaranteed investment contracts that provide a fixed rate of return. However, if you want to invest in something that’s not offered through the plan, you will have to make the investment outside of your 401(k). Still, all of the money in your 401(k) won’t necessarily be invested according to your own wishes. Many companies that match an employee’s contribution with a contribution of their own insist that the company’s contribution be put into the company’s own stock. So, just as you have the right to invest your own 401(k) money as you wish, the company has the right to choose how its matching funds will be invested on your behalf.

What can I do if I don’t like my 401(k) plan’s investment options?
An employer has the right to decide what type of investments that its 401(k) plan will offer. As a plan participant, you get to choose from this investment menu when deciding how your contributions to the plan will be allocated. If you don’t like the investment options that your 401(k) provides, talk to your company’s human resources or personnel department about changing them. Your employer wants its 401(k) plan to be attractive, so it should welcome suggestions about alternative investment options from its workers. Of course, you can’t expect the company to change the plan’s menu of investments simply to suit you. If several employees express an interest in, say, an international mutual fund, there’s a good chance that it will be added to the 401(k) plan’s list of investment options. But if you have some bizarre desire to buy and sell raccoon-pelt futures, don’t expect the company to restructure its plan to accommodate your unusual impulse.

What are the advantages and disadvantages of owning company stock in my 401(k) account?
Many 401(k) plans allow you to invest some or all of your contributions to the plan in the company’s own stock. In addition, some employers give their matching contribution in company stock rather than in cash. Buying stock in your own company through your 401(k) offers some clear advantages -- and disadvantages too. On the bright side, you probably know more about the company you work for -- its strengths, weaknesses and growth prospects -- than any other. As an "insider," you probably have a good idea of whether it’s on the upswing or its best days are behind it. But it’s risky to have both your paycheck and retirement nest egg riding on the success of a single company, no matter how bright its future. If the company runs into trouble, you could lose your job and your retirement fund could suffer if the value of the stock falls. If you already receive company stock through your employer’s matching contribution, that’s great. But you should carefully evaluate the risk before you increase your investment in the stock by purchasing additional shares for your account.

Why doesn’t my 401(k) plan allow me to transfer money from a GIC fund to a money market fund?
The answer has to do with the nature of guaranteed investment contract (or GIC) funds and money markets funds, two of the most conservative investments. GICs are issued by an insurance company and sold only to pension and other retirement plans. They pay a fixed interest rate for a fixed term, typically one to five years. Many 401(k) plans offer a GIC fund -- often called a stable value fund or an insurance contract fund -- which buys GICs from many different insurers. A money market fund invests in relatively short-term financial instruments, such as Treasuries and bank certificates of deposits. Rates on money market funds are usually lower than on GICs because money market investors don’t want to keep their cash tied up for long periods of time. Many 401(k) plans prohibit transfers from a GIC fund to a money market fund because the fixed rate earned on a GIC is conditional on leaving the money invested for the term of the contract. If GIC fund investors could cash out early when interest rates go up, the fund might be forced to sell its long-term investments at a loss to pay the investors their money.

How do my 401(k) contributions lower my income taxes?
Contributions to a 401(k) reduce your income taxes because the amount you contribute isn’t reported as income on you W-2 form to the Internal Revenue Service. The important thing about this tax break is that it makes 401(k) contributions much more affordable: Let’s say Kate earns $25,000 a year. Her marginal federal tax rate is 27%, and her state and local taxes add up to another 4% for a total 31% tax rate. Kate contributes $1,000 a year to the 401(k) plan. That reduces her taxable salary to $24,000 a year. But it also cuts her income taxes by $310 (32% of $1,000).

After I’ve made the maximum pre-tax contribution allowed, can I put additional money into the 401(k) plan if I want to?
Most 401(k) plans allow workers to make only pre-tax contributions. Other plans allow you to make both pre-tax and after-tax contributions. Most of these plans are older savings programs that were converted to a 401(k) plan after 401(k)s were introduced back in 1978. An after-tax contribution won’t reduce your taxable income. But its earnings in the 401(k) plan will grow, tax-deferred, until you withdraw them.

What are the differences between a pre-tax and an after-tax 401(k) contribution?
Perhaps the most important difference between a pre-tax and an after-tax contribution to a 401(k) plan (or any other retirement plan) is that an after-tax contribution won’t reduce your annual income tax bill. However, like a pre-tax contribution, an after-tax contribution will grow tax-deferred inside the 401(k) until you take the money out. If your company makes matching contributions to your 401(k), it will probably only match your pre-tax contributions. The main thing to understand is that eventually, everything is taxable. The big difference between pre-tax and after-tax contributions is when the tax falls due. Uncle Sam only gets to take one bite of the apple. You have to pay taxes sooner or later, but not both sooner and later. Pre-tax contributions are taxable when you take them out of the plan because they weren’t taxed when they went in. If you take them out before you reach age 59 1/2, you’ll also owe a 10% early withdrawal penalty unless you qualify for a special hardship withdrawal. After-tax contributions can be made to a 401(k) plan if the plan allows them. Because you’ve already paid taxes on this money, you won’t owe additional taxes on it when you take it out of the plan. But when you withdraw after-tax contributions you made after 1986 you must, at the same time, withdraw a proportionate share of the interest they earned. That interest is subject to income taxes and to an early withdrawal penalty if you’re under 59 1/2.

Should I make both the maximum allowable pre-tax and after-tax contributions to my 401(k) every year?
If you have a 401(k) retirement plan, you should always make the maximum allowable pre-tax contribution. The contribution will lower your taxable income, and will grow-tax-free inside the plan until you start making withdrawals. As long as you’re not suffering any cash-flow problems, you should make the maximum allowable after-tax contribution as well. Although after-tax contributions don’t help reduce your annual income tax bill, they still grow tax-free until withdrawals begin. And if you ever need to access the cash before you retire, you may be able to borrow against the built-up equity of your 401(k)-a privilege that Individual Retirement Accounts (IRAs) and many other savings plans do not grant.

Do I have to pay Social Security taxes on the money I contribute to the 401(k) plan?
Many 401(k) investors mistakenly believe that the money they contribute to the plan isn’t taxed at all. But contributions are not exempt from Social Security taxes. For example, if you contribute $2,000 to a 401(k), you will pay Social Security taxes on the entire amount unless you have already paid the maximum Social Security taxes for the year. The silver lining is that your Social Security benefits won’t be reduced by your participation in a 401(k). Of course, one of the great things about contributing to a 401(k) is that the money you contribute will be exempt from federal income taxes. It will also be exempt from any state taxes, unless you live in Pennsylvania. Contributions are also exempt from local taxes in many municipalities.

Do I pay any taxes at all on the pre-tax contributions I make to my 401(k) plan?
Pre-tax contributions you make to a 401(k) retirement plan are not taxable on your annual federal and state income tax returns. So, if you earn $50,000 but put $4,500 of it into the 401(k), you will only owe federal and state taxes on $45,500. However, pre-tax contributions are subject to Social Security taxes. So, the full $50,000 would be taxed by the Social Security Administration.

Does the law allow me to deduct contributions I make to my 401(k) retirement plan?
The Taxpayer Relief Act of 1997 did not change the rules concerning the deductibility of contributions to a 401(k). Although contributions to some types of individual retirement accounts (IRAs) can be deducted, contributions to a 401(k) plan cannot. It is important to note, however, that most people who contribute to an employer-sponsored 401(k) plan make those contributions on a pre-tax basis. Such contributions lower the taxpayer’s adjusted gross income, which means they don’t have to pay taxes currently on the money they put into the 401(k). The taxes are deferred until the money is withdrawn. For example, a taxpayer who earns $50,000 this year but contributes $2,500 of it on a pre-tax basis to the employer’s 401(k) would owe income taxes on just $47,500 of his or her income.

What is a matching contribution to a 401(k)?
Many employers who make a voluntary contribution to their worker’s 401(k) plans do so on a "matching" basis. For example, for every $1 you contribute to your plan, the company might agree to add 25 or 50 cents. But there’s a ceiling on their generosity: most companies will stop matching once you have contributed 3 percent to 6 percent of your own salary to the plan. As an example, say you earn $40,000 and your employer offers a 50 cent match for the first 6% of pay you contribute to the plan. That means that if you make the full $2,400 annual 401(k) contribution, your employer will add an extra $1,200. That’s the equivalent of a guaranteed, risk-free 50 percent return on your investment-a proposition that you’re not likely to find elsewhere.

What is a profit-sharing contribution to a 401(k)?
Some 401(k) plans have provisions that require non-elective or "profit sharing" contributions from the employer as well as the more common matching contributions that are based on the amounts contributed to the plan by employees. Profit-sharing contributions are allocated to the accounts of all the eligible employees, whether or not they defer any of their compensation to make contributions to the plan. Matching contributions are allocated only to those participants who defer into the plan.

Why do employers contribute to 401(k) plans if they don’t have to?
Many companies contribute to their own 401(k) plans to "stay competitive with other employers and make sure that talented people think of their companies as good places to work. Employers want to attract and retain valuable employees and a 401(k) plan is a very popular and visible employee benefit. They also want their workers to be able to retire with enough money to maintain a comfortable standard of living. When a company’s former employees live comfortably in retirement, its image is enhanced with shareholders and customers, as well as with current and prospective employees.

Do my employer’s contributions go into the 401(k) plan at the same time as mine?
If you’re a salaried worker who has a 401(k) plan, your contributions to the plan are probably deducted directly from each paycheck- regardless of whether you are paid on a weekly, biweekly or monthly basis. If your employer matches your contributions, it doesn’t have to follow the same schedule. Some employers put matching contributions into the plan along with employee contributions. Others add their match monthly, quarterly or annually. Depending on the company’s annual profits, some employers also offer a 401(k) bonus contribution. The basic match may be 50 cents for example, but the company might add up to 50 cents more in a good year. If applicable, typically the bonus will be contributed in a lump sum after the end of the year.

My spouse and I are both eligible to participate in 401(k) plans at work. We can’t afford to put the maximum contribution into both plans. How do we decide how much to put into each plan?
If you’re married and both you and your spouse are eligible to participate in a 401(k), it would be wise for each of you to make the maximum allowable contribution to each plan. But if you’re like many married couples, you probably can’t afford it. Deciding how much to put into each plan involves four key factors.
1. The amount of each employer’s matching contribution (if any).
2. How soon each of you will be fully vested in those matching contributions.
3. How much you like the investment choices available in each plan.
4. Which plan allows you to borrow money if you’re likely to need a loan.
According to "Building Your Nest Egg with Your 401(k)" (American Press Inc., Washington Depot, Conn.), "All things being equal, you should make the maximum contribution to the 401(k) plan with the higher matching contribution. But all things may not be equal. Perhaps one of you is less likely to stay with his or her present employer long enough to become fully vested; it may make more sense to opt for a plan that has a lower matching contribution if you’re a lot likelier to become vested in that employer’s matching contribution. One plan may feature a greater range of investment choices than the other one, or may include investments that have performed better.
"Finally, consider whether or not you can borrow from your 401(k) account. Not all 401(k) plans allow you to do to this. If you anticipate that you’ll need to borrow from your retirement nest egg to cover a major expense -- the cost of a college tuition or a down payment on a house -- a loan feature could be the determining factor in choosing one 401(k) plan over the other.

At what point do I own my employer’s contributions to my 401(k) account?
Any money of your own that you put into your 401(k) is automatically yours to keep. You could take the money with you, even if you quit your job at the end of your first week. But that’s not necessarily the case with the money that your employer may contribute on your behalf. In some plans, you’re vested in [own] your employer’s contributions immediately. Other plans might not vest you 100% until you’ve been in the plan for five years, or they start vesting you gradually 20% per year from year three. But in all cases, by law you must be fully vested in your employer’s contributions after seven years of service for graded vesting and five years of service if they use a 100% at five years cliff vesting schedule. Also, all plans must consider you fully vested after you attain normal retirement age under the plan document, ususally age 65. Most will fully vest you if you die or become disabled, and if the plan is terminated, you will always be 100% vested.

How are my years of service determined in regard to vesting in a 401(k) plan?
Many employers who make matching contributions to their workers’ 401(k) plans require employees to work a specified number of years before they’re entitled to collect the money that the employer has kicked in. This process is called vesting. In some plans, your employer’s contributions are vested immediately. In others, you don’t even start vesting until at least five years have passed-meaning that you can’t keep any of the company’s contributions if you leave its employ anytime sooner, but after five years of service you will be 100% vested. Companies that don’t offer immediate vesting base their vesting on the worker’s years of service to the company. By law, you must be fully vested-in other words, be entitled to all the funds your company has contributed to your 401(k) plan-after seven years of service using a graded vesting schedule and five years of service using a cliff vesting schedule. Your employer can use one of two methods to determine your years of service. In the first, your years of service are determined by the number of hours you actually worked in a 12-month period. You must be credited with a year’s service for any 12-month period in which you worked at least 1,000 hours. This lets you earn a year of service in less than 12 months. The second way to calculate years of service is the elapsed-time method. Your employer counts 12 months per year from the date you were hired to the date you leave, regardless of how many hours you worked. Many companies use both methods: the first is often used to determine your eligibility to participate in the plan, and the second is used to decide when you’re fully vested in the company’s contributions to the plan.

Can I stop contributing to my 401(k) account if my budget is tight and I can’t afford to save the money?
Most 401(k) plans will allow you to stop contributing to the plan at any time. However, there’s no legal requirement to allow this. Ultimately, it’s a decision that’s in the hands of the plan’s administrators. Some plans lock each participant into a specific contribution for a full year. If you’re not sure what the rules are, contact your employer’s human resources or personnel department.

Can I take my money out of my 401(k) plan if I stop contributing to it?
The fact that you’re no longer contributing to the plan doesn’t mean you can start taking withdrawals. There are only three ways to take money out of your 401(k) account: distributions, early withdrawals and loans. You can take distributions after age 59 1/2 when you leave your job; you can take early withdrawals only for reasons specifically approved by the Internal Revenue Service and the plan. Whether or not you can take a an early distribution or a plan loan depends on your plan’s rules.

Can I borrow money from my 401(k) before retiring?
In many cases, the answer is yes. But you need to check the details of your employer’s plan to be sure. Smaller companies in particular may not want to take on the cost of setting up a system to make and monitor 401(k) loans. Many plans that permit borrowing allow employees to tap up to half the amount in the account (but never more than $50,000). You pay interest on the loan to your own account, typically a percentage point less than what banks charge on secured personal loans. You must make payments on the loan at least once every quarter. The entire amount usually must be repaid within five years unless the money is used to purchase a principal residence.

Must my spouse agree to a loan from my 401(k) plan?
If you are married and hope to borrow from your 401(k) plan, your spouse’s approval may be required. Your spouse’s approval will certainly be required if your 401(k) plan follows standard joint-and-survivor rules, which means that you and your spouse have the option of receiving your retirement payout in the form of lifetime annuity payments. Your company’s human resources, personnel or benefits department can give you the details.

Is it better to borrow from my 401(k) account rather than make early withdrawals?
In some cases, you can borrow from your 401(k) account rather than making an early withdrawal. Borrowing from your 401(k) is a much better option because it will allow you to escape the stiff taxes and 10% penalty that are levied on early withdrawals. Some 401(k) plans permit borrowing, but others do not. The decision rests solely in the hands of your employer. If your employer permits borrowing, there are other reasons why a loan is much better than an early withdrawal. Instead of costing you money, a 401(k) loan will actually earn money for you because you will repay the money -- to yourself -- along with interest. Borrowing from a 401(k) is also much easier than borrowing from a bank because there are no credit standards to meet. Since you own the money in your 401(k), you automatically qualify for a loan if the plan permits them. Legally, loans can be allowed for any reason. But most plans permit them only in specific, approved situations, such as if you’re using the money to buy a house or pay for college tuition. Employers have two good reasons for restricting plan loans. One is that loans add to the cost of administering the plan. The other is that allowing loans for any reason can defeat a 401(k) plan’s main purpose, to ensure that you retire with a substantial nest egg.

Is there any drawback to taking a loan from my 401(k) account that I should be aware of?
Probably the biggest pitfall facing a 401(k) borrower is having to pay all the money back in a lump sum in case you quit your job, get laid off or are fired. Very few plans allow a former employee to continue repaying a 401(k) plan loan. If you leave your job, voluntarily or involuntarily, you’ll almost certainly have to repay the outstanding balance within 60 days -- into the 401(k) plan or into a rollover IRA -- or the IRS will treat it as an early withdrawal on which you owe income taxes and an early withdrawal penalty. If you’ve spent all the money, that puts you in a very tough spot. Paying the money back in a lump sum won’t be a problem if you have lots of money tucked away in savings or if you have other investments that can be sold in order to raise cash. Or, if you own a home, you might be able to borrow against your equity to pay the loan back. But if you can’t find a way to pay the loan off, your problems will be compounded by a big tax bill.

How much of my total 401(k) account can I borrow?
If your employer allows you to borrow from your 401(k), the maximum loan is half of the value of the account. Federal law will limit the amount to the lesser of $50,000 or 50% of the vested balance. Say you have $80,000 in your 401(k) plan. You could borrow up to 50% of the value of the account, which means you could get up to $40,000. However, if your 401(k) plan is worth $100,000 or more, federal law would prohibit you from borrowing more than $50,000 -- even if your account is worth millions. However, some plans impose even lower limits; the plan document may limit the maximum amount for loans and restrict the availability of loans.

What will a loan from my 401(k) plan cost me?
When you borrow money from a 401(k), the Internal Revenue Service requires that you charge yourself a "market rate" for the loan. The market rate is considered the rate you’d pay if you got the loan from a bank instead. Usually, the market rate is one or two percentage points above the prime rate. So, if the prime rate is 7%, the rate on your 401(k) loan should be 8% or 9%. Many 401(k) plans also charge loan-processing and administrative fees that can add up to hundreds of dollars. But borrowing from your 401(k) is still much better than borrowing from a bank, because you’re paying the interest to yourself. Essentially, the loan becomes a fixed-rate investment in your own 401(k). When you retire, you’ll get all the money back, but the interest you pay on the loan with after-tax dollars will be taxed a second time when you withdraw it.

How soon do I have to repay a loan from my 401(k)?
If your 401(k) permits borrowing, you will probably have to repay the loan through a series of regular payments. More than likely, your employer will automatically deduct the payments from your regular paycheck -- much as it automatically deducts your 401(k) contributions. The entire amount you borrowed must be repaid within five years with one exception: if you took a loan to buy a principal residence, the law says that it must be repaid in a ’reasonable’ period of time. Most plans give you up to 25 years to pay it back, but the term of the loan can’t extend beyond your normal retirement date, as defined by the plan. The catch is that if you leave your employer, whether voluntarily or involuntarily, you will probably have to pay all the money back in a lump sum within 60 days. That could put you in a tough spot, especially if you have spent all the money.

Is the interest I pay on a 401(k) loan tax-deductible if I use the money to buy a house?
If you are planning to borrow from your 401(k) and use the proceeds to buy a home, keep this in mind: the interest you pay on the loan from the account will not be tax-deductible, unless the house itself is used as collateral for the loan. When you borrow from your 401(k), the collateral is actually the remaining balance in your account, unless you specify in the loan agreement that the house will be collateral for the loan. If not, you can’t deduct the interest you pay back to your 401(k) even if you use the loan proceeds to buy a home. This tax rule might seem unfair, but it actually makes perfect sense. By its very nature, a 401(k) is a tax-deferred investment: Allowing you to deduct interest on loans from the account would amount to giving you one tax break on top of another. Before you borrow from your 401(k), check with a few local lenders to make sure they will accept 401(k) loans as down payments. Many banks won’t make loans to buyers who have had to borrow their down payment, in part because they don’t want another creditor coming forward with a claim on the home. But some lenders make an exception for 401(k) loans because the money comes from your own savings.

Can I use my 401(k) account as collateral for a bank loan?
No. You can’t legally pledge retirement plan assets as collateral, and the vast majority of bankers wouldn’t accept it anyway. Why? Because the money you have socked away in a 401(k) is be protected from creditors under federal law. Lenders understandably don’t want to make a loan based on collateral that they can’t collect.

If I withdraw from my previous 401(k) plan to buy a house will I owe taxes and penalties?
If you take the money from your former employer's 401(k), you'll have to pay income taxes on it, plus a 10% penalty if you quit before age 55. A little two-step will let you dodge part of the penalty. Roll the money into an IRA, then tap that account for your down payment. A first-time home buyer - defined as someone who hasn't owned a house in the past two years - can take $10,000 from an IRA penalty-free. You will still owe tax on the withdrawal. Before you do this, ask yourself whether you have any other source for the down payment. This would be preferable to using retirement funds and permanently losing the tax-deferral benefits. If interest rates are low, consider paying less than the traditional 20% up front so that you can leave the retirement money intact.

How do I qualify for a hardship withdrawal from my 401(k)?
Your eligibility for a hardship withdrawal from your 401(k) plan depends on the plan’s rules. You’ll probably have to provide relevant information showing your financial need -- an eviction notice, a contract to buy a primary residence, unreimbursed medical bills or a college tuition bill. Some plans require that you sign a form stating that you have no other source of money to deal with this emergency. Other companies instead consider that you’ve exhausted all other resources if:
1) you have taken all permissible loans from the plan;
2) you make no plan contributions for the next 12 months;
3) you make only limited contributions in the year after that; and
4) you withdraw only as much as you need to cover the immediate emergency.
Remember: Even if you qualify for a hardship withdrawal from your 401(k), you will still have to pay a 10% penalty in addition to the normal federal, state and local income taxes.

What taxes will I owe on a hardship withdrawal from my 401(k)?
If you qualify for a hardship withdrawal from your 401(k), you’ll owe ordinary income taxes on the money you take out except for any money you might have contributed to the plan on an after-tax basis. On top of those taxes, you will also likely pay a 10% early withdrawal penalty. Simply meeting the hardship requirements is not enough to avoid the 10% fine. To illustrate, say you are under age 59 1/2 and you withdraw $30,000 from your account for a qualifying hardship situation, such as buying a house or avoiding foreclosure. If your combined federal, state and local tax rate is 40%, then $12,000 of your withdrawal will be used to pay income taxes. Throw in a 10% early withdrawal penalty of $3,000, and the figure rises to 50%. In other words, you’ll get to keep only $15,000 of the $30,000 you pull out. In short, make an early withdrawal from your 401(k) only if you have nowhere else to get the money.

What is meant by a premature distribution from a retirement plan?
When you withdraw money from a retirement plan earlier than the age required by the Internal Revenue Service (59 1/2), the money you receive is known as a premature distribution and is subject to a 10% penalty unless you qualify for an exception to the penalty.

If I withdraw funds from my 401(k) early, will I have to pay a penalty tax?
As with most other types of retirement plans, the Internal Revenue Service levies a penalty on people who withdraw money from their 401(k) plan before they reach a certain age. As a general rule, you’ll be hit with a 10% penalty on any withdrawals you make from a 401(k) before you have reached age 59 1/2. You will also have to pay taxes on the money you take out, just as you would if you waited until after you turned 59 1/2. In rare cases, the IRS will waive the 10% penalty on early withdrawals. For example, you can avoid the penalty if you are disabled, or if you need money for medical expenses that are greater than 7.5% of your adjusted gross income. You can also avoid the penalty if you are at least 55 years old when you separate from service.

Why do I have to pay an early-withdrawal penalty for withdrawing my own 401(k) money?
Many people feel it’s unfair for the government to levy a 10% penalty when they make an early withdrawal for their 401(k) plan or Individual Retirement Account (IRA). After all, they point out, it’s their money -- not the government’s. Such feelings are understandable. But it’s important to remember that 401(k)s, IRAs and similar plans were created to reward you with certain tax breaks that would encourage you to save for retirement. The plans were never intended to be vehicles to save for pre-retirement expenses. By imposing a stiff penalty on early withdrawals, the government hopes to keep you from tapping the money early so you’ll have more left over for your golden years.

How is the 10% penalty on early withdrawals from a 401(k) calculated?
The 10% penalty on early withdrawals from a 401(k) plan applies to the entire taxable amount that’s distributed to you before you reach age 59 1/2 if you are still employed unless you meet one of the exceptions to the penalty.

How can I withdraw money from my 401(k) early without penalty?
By law, you may not withdraw funds attributable to elective salary reduction contributions until you reach age 59 1/2, are separated from service, become totally disabled, or show financial hardship. Lump-sum withdrawals are also allowed if the plan terminates. If hardship withdrawals are allowed before age 59 1/2, you are generally subject to the 10% penalty for premature withdrawals. IRS regulations restrict hardship withdrawals. The IRS requires you to show an immediate and heavy financial need that cannot be met with other resources. Financial need includes the following expenses: purchase of a principal residence, tuition and related expenses, medical expenses, preventing your eviction or mortgage foreclosure and paying funeral expenses for a family member.

What happens to my 401(k) account when I retire?
If you have a 401(k) and retire, you will likely have four choices(assuming you are over 59 1/2). Those choices will be: 1. Taking the money in a lump sum. If you do, you’ll owe income taxes on all of it. The disadvantage is that after you’ve taken the lump-sum distribution, your money is no longer in a tax-deferred retirement account. That means that the only way to avoid tax on any future earnings is to invest it in tax-exempt instruments. 2. Rolling your entire balance into an IRA. Then you can take out money as you need it, paying income taxes only on the amount you withdraw. This gives you more flexibility than any other option. Most of your money will continue to be sheltered in a tax-deferred account. You’ll have a nearly unlimited choice of investments, too. 3. Taking a 401(k) payout as a lifetime annuity. Not all plans offer this. An annuity pays a monthly benefit for your lifetime alone or, if you choose a joint-and-survivor annuity, for your lifetime and your spouse’s. The advantage of an annuity is that it provides a guaranteed lifetime benefit. The disadvantage is that, because it’s a fixed amount, its purchasing power will be reduced every year by inflation. 4. Leaving some or all of the money in your 401(k). You must have at least $5,000 in your account to do this. This choice makes little sense, however, since, if you like the investments available in the plan, you can use those same investments in your own IRA and completely control you access to your money. If you leave it with the plan, you’ll need to comply with the plan administrator’s rules and proceedures for making withdrawals or changing investments.

How long after I retire will it take me to get my 401(k) money?
After you retire, there’s no legal requirement that says you must receive a check from your 401(k) plan by a specified date. The government merely requires that the plan pay you within 60 days after the end of the plan year during which you reach retirement age. This requirement gives 401(k) plan administrators lots of flexibility when deciding when to cut the checks for retirees. Any procedures your employer establishes within the guideline are OK, as long as they are uniform and treat all of the company’s workers equally.

What happens if I don’t start taking money out of my retirement account at age 70 1/2?
If you don’t start taking money out of your retirement account by the time you reach age 70 1/2, you’ll be hit with some extremely serious tax penalties. The Internal Revenue Service will slap you with a 50 percent excise tax on the difference between what you withdrew (if anything) from the account and what you should have withdrawn. On top of that, you’ll owe additional excise tax for each year you fail to make the required distribution. For example, if you should have taken $9,000 from the account but didn’t take out a cent, you would owe the IRS $4,500 for that year’s requirement. If you fail to make the required distribution for the following year,assume it’s $8,000, you will own another $4,000 for that year. And on top of all that, you’ll owe regular income taxes on each withdrawal as well!

How can ten-year forward averaging mitigate my tax liability on a lump-sum withdrawal from a retirement plan?
If you take a lump-sum withdrawal from a retirement plan and don’t roll it over into another qualified account, you will owe taxes on the entire lump sum. Fortunately, if you were born before 1936, you can reduce the tax bite by using an accounting method known as "ten-year forward averaging." When you use ten-year forward averaging, you calculate the tax on one-tenth of the amount, using the 1986 tax table, and then multiply the tax by ten. For example, if the lump sum is $250,000, dividing by ten gives us $25,000. The 1986 tax table calculates the tax to be $5,077. Multiplying by ten we get $50,770 for the total tax on the distribution. When using this method, you can’t take any deductions or exemptions and you must pay taxes at the single taxpayer rate. Nonetheless, the tax you will owe by using forward averaging will likely be much less than without it. You can use forward-averaging only once in your lifetime. To be eligible, you must have been in the plan for at least five years. In addition, you must stop working for the employer who pays the lump sum and take all the retirment plan account balances in lump sum. Lump-sum pension payments involve some extremely important tax issues, and forward averaging is only one of them. Anytime you are considering taking a lump-sum payment, talk to a tax and financial planning specialist first.