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Most 401k investors rely on their month
or year end 401k balance statements to see the financial
position of their retirement plans. Most of them however
do not understand the rules and regulations specified in
the 401k document (you can request a copy of this document
from your 401k administrator). Here are 5 things that you
MUST know about your 401k plan in order to avoid committing
bad investment moves:
Many employers that you work for have
what's called a vesting schedule where you must put in a
certain # of years of work before you are eligible for the
employer sponsored match 401k contributions. For most employers,
this # is 3 years. Therefore, if you quit working with your
current employer in less than 3 years, you are eligible
for 0 employer sponsored match 401k contributions. Why?
Because that's just the way it is! Back in 2001, this #
of vesting years (also known as "three year cliff")
was 5 years!
Check with your employer as to the
vesting schedule policies. Some employers now allow immediate
vesting where you are eligible for employer sponsored 401k
match contributions as soon as you start working for that
company.
The above title is as simple as it
gets. If you borrow a 401k loan from your employer and heaven
forbid are laid off, fired or quit your job, you will have
to pay back this loan immediately! What if you cannot pay
back this loan immediately? You will be faced with a 10%
early withdrawal penalty fee plus the local state taxes.
Therefore, think deep before you borrow from your own 401k
plan.
If you quit your current employer while
your 401k balance is less than $5000, you should roll it
over to an IRA or your new employer's 401k administered
plan. This is because the old employer will not allow you
to keep a balance of less than $5000 in his 401k plan. If
you quit your employer with a balance of less than $5000,
here are the steps to follow:
- Instruct your employer to make out
a check to your 401k or IRA custodian for a 401k rollover.
- Or instruct your employer to make
out a check directly payable to you. However, if you choose
this option, your employer will withhold a 20% federal
tax and remit it to the government. Furthermore, you will
also face a 10% early withdrawal penalty fee if you choose
this option. Therefore, we suggest you choose option #1.
If you work for a small firm, you could
be getting charged all kinds of fees. Some of these include:
- 401k Record Keeping fees
- Mutual fund sales charges
- 12b-1 fees
- Investment Transaction fees.
If you are faced with many of these
charges, you should tell your employer to switch to a no-load
401k administrator such as Fidelity Investments or VanGuard.
Some 401k plans will encourage you
to invest in variable annuities offered by insurance companies,
because of their tax-advantages. You should NOT really settle
for this, because investing in a 401k plan already means
you are in a tax-advantaged situation (tax deferral until
the age of 65 or when you retire). You should instead invest
in 401k plans that invest in mutual funds such as the no-load
mutual funds provided by Fidelity Investments or VanGuard.
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