It’s important to have a good understanding of how your retirement plan works.
Here are some questions you should ask.
Participating in your employer’s retirement plan can help you save for your retirement years. But to make the most of the plan, you’ll want to have a good understanding of how it works. Here are some questions you should ask.
What type of plan is it?
The first thing you should find out is whether your employer offers a defined benefit plan or a defined contribution plan. A defined benefit plan is employer funded and provides a specific monthly pension benefit to you when you retire. A defined contribution plan, such as a 401(k) plan, does not promise you a specific retirement benefit. Instead, the amount you receive depends on the balance in your plan account when you retire (or receive an earlier distribution). Both employer and employee contributions may be allowed, and employees may be responsible for choosing their account investments from the plan’s list of options.
Who is eligible to participate and when?
Federal law allows employers to include and exclude certain groups from a retirement plan. For example, there may be one plan for salaried employees and another for union employees, or a plan may not cover some part-time employees at all. Eligibility is generally based on age and years of service to the company.
How do I contribute?
Some plans have auto-enrollment, which means employees are automatically enrolled in the plan unless they choose to opt out. These plans also have a predetermined contribution amount that is automatically taken from the employee’s paycheck and put into a predetermined investment in the plan. Employees should receive information on how to change their contribution amounts and investments or how to opt out altogether. If your plan doesn’t have auto-enrollment, you’ll be able to choose your contribution amount and investments upon eligibility to join the plan.
Contributions taken from your paycheck are typically made pretax. If your plan has a Roth option, you can make after-tax contributions to your plan. Your employer may contribute to your account as well, through matching contributions—where the amount you contribute is matched up to a certain percentage—or profit sharing contributions, or both.
Would I forfeit the amount in my plan account if I leave my employer?
Your plan’s vesting schedule will tell you how much time you have to be with your employer before you can keep your employer’s contributions to your plan account and any investment earnings on them. For example, your plan may have a four year vesting schedule, where you may be 25% vested after your first year of service and 25% for each year after until you reach 100%. You are always 100% vested in your own contributions to the plan and in any earnings from those contributions.
When can I take money out of the plan?
That depends on the terms of the plan. But as a general rule, you’ll want to wait until you retire to start withdrawing your retirement savings. You may have to pay a 10% early distribution penalty (in addition to regular income taxes) if you take money from the plan before age 59½.1 At age 72, you’ll generally have to begin taking a minimum amount from your retirement account each year.2
You may be able to take a loan from your plan.3 Your plan also may allow you to take a hardship withdrawal in a financial emergency.
So how do I find out all of this information about my plan?
A formal, written plan document is a requirement for any retirement plan. Your employer should also provide you with a less formal summary plan description, which should include the plan’s rules and other information you may need to understand the plan.
Your financial and tax professionals are another resource you can turn to for assistance with retirement planning and assessing your workplace retirement plan.
- Penalty-free “coronavirus-related” distributions (CRDs) may be available in 2020 under the CARES Act.
- The CARES Act waives certain 2020 required minimum distributions (RMDs).
- Higher loan limits and delayed repayment terms may apply for certain loans in 2020 under the CARES Act.
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The information contained herein is based on sources believed to be reliable, but its accuracy cannot be guaranteed. Our firm does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in connection with your independent tax or legal advisor. The articles and opinions in this advertisement are for general information only and are not intended to provide specific advice or recommendations for any individual. All information as of 01/01/2021.
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