Answers to 401k Plans
What’s on this page
- What is a 401k plan?
- How does a 401k plan work?
- Required minimum distributions of a 401k plan
- Benefits of a 401k plan for employers
- When to start a 401k plan?
- What are the 401k plan maximum contributions for 2018?
- How to manage a 401k plan?
- Is a 401(k) an employer sponsored retirement plan?
- What is a Roth 401(k) plan?
- What is a Traditional 401(k) plan?
- What is a Solo 401(k) plan?
- What are some 401k plan features
- Setting up a 401k plan
- What qualifies as a hardship withdrawal from a 401k plan?
- How does a 401k plan loan work?
1. What is a 401k Plan?
A 401k plan is a type of retirement plan provided to each employee working full time by the employer. An employer is the one who is known as the plan sponsor.
This type of retirement plan allows those employees who are enrolled to save and invest a percentage or dollar amount of their salary for retirement.
2. How does a 401k Plan work?
Individuals enrolled in an employer sponsored plan saves a portion of their salary and places those dollars into investments within the 401k. This money is set aside by an employer into individual accounts owned by each employee. Generally speaking 401k plans provide at a minimum of 3 investment model options. Each person who places their money into these investment options has tax-deferred income for retirement – meaning that the individual does not pay any taxes on the earnings every year until those funds are distributed.
When money is withdrawn prior to the age of 59 ½ , those dollars are subject to taxes with a 10% penalty.
At retirement age of 59 ½ and older, individuals who contributed to their traditional 401k will pay taxes on their investment.
• This is due to not paying taxes over the course of time.
There are certain rules for 401k loans and financial hardships we will answer on an individual topic.
3. Required Minimum Distributions of a 401k Plan
Individuals who have an account must begin withdrawing required minimum distributions (RMDs) from the plan following April 1st of the calendar year in which a person reaches the age of 70 1/2.
Regardless if an individual is retired or not, a minimum amount must be withdrawn annually.
Generally, individuals who have an IRA, SEP IRA, SIMPLE, 401k or 403b account are required to withdraw funds or get hit with a penalty of 50%.
Businesses can write-off matching contributions and plan expenses. See your accountant for more details.
4. Benefits of a 401k Plan for employers
- Employer contributions are tax-deductible.
- Assets in the plan grow tax-free.
- Flexible plan options are available.
- Tax credits and other incentives for starting a plan may reduce costs.
- A retirement plan can attract and retain better employees, reducing new employee training costs.
- Ability to take out loans from a 401k(k) acting as your own creditor. Loans must be paid back within 60 months with interest based upon the terms of the plan.
5. When to Start a 401k Plan?
Both private and public companies that have stable earnings can implement a company-wide plan at any time throughout the year.
Employers seeking for additional tax deductions, looking to provide a retirement benefit for their employees or seeking a retirement plan themselves should know: plans take a few weeks to design.
For safe harbor 401k plans, employers have until October 1st to have it active for the current year.
6. What are the 401k Plan Maximum Contributions for 2018?
The maximum contributions for 2018 is $18,500. Individuals 50 and older have a $6,000 catch up provision.
Employee salary deferrals and (after-tax) Roth 401k contributions, including employer matching maximum amount, is $54,000, or 100% of employee compensation, whichever is lower.
Those over the age of 50 are allowed $61,000 with a catch-up contribution.
|Contribution Limit||2018 Tax Year||2017 Tax Year||2016 Tax Year|
|Catch-up contributions (in addition to the above limits)||$6,000||$6,000||$6,000|
7. How to manage a 401k Plan?
Managing your 401(k) takes work an administrator generally handles. Typically, an internal employee who handles payroll, accountant or human resources professional knowledgeable in keeping up with the company finances.
When it comes to the actual 401k plan administration such as the investment portfolio’s transactions and the recordkeeping and reporting, are in the hands of the company providing the 401k.
An investment company provides the service to confirm when and how to reallocate and rebalance your assets.
Record keeping is only one aspect of a 401k plan, to manage the performance of the portfolio you’ll want to know the plan rules and procedures including the investment cost.
Employer-sponsored plans typically come with a variety of investment options to select from.
There are predefined models that are available with a minimum of 3 options.
Ranging from conservative to aggressive that depends on the individual’s investment risk tolerance.
8. Is a 401(k) an employer sponsored retirement plan?
401(k) plans are employer-sponsored retirement plans and can be a great source of income for retirement. Employers who offer matching contributions deduct their matching percentage from taxes.
Individual business owners with no employees have the ability to establish their own solo 401(k) plan. Employers with employees are sponsors for a company 401k plan.
A 401(k) is a defined contribution plan, meaning each participant in the plan has to place funds into their own account.
A 401(k) plan, does not promise individuals participating a specific payment upon retirement.
9. What is a Roth 401(k) plan?
A Roth 401k is similar to the traditional 401k. The main difference is how the money going into the plan on behalf of the employee are after-tax dollars. What this means is that taxes will be paid now from each paycheck, and once taxes are taken out of each paycheck the amount that remains will then go into the retirement account.
10. What is a Traditional 401(k) plan?
Traditional 401k plans in simple terms are pre-tax (before tax) dollars going placed into the individual’s account. These pre-tax dollars have no paid any taxes until the money is withdrawn. Assuming those funds grow in the account over a long period of time for retirement, the growth will be tax-deferred. Withdrawing from the account prior to retirement age of 59 ½ will result in taxes and penalties. After 59 ½ taxation still applies.
11. What is a Solo 401(k) plan?
A Solo 401(k) simply the same a regular company 401k but designed for an individual, self-employed business owner. Generally, a Solo 401k plan provides higher contributions limits than a SEP or SIMPLE plan while providing the same tax benefits of a regular 401k without the high fees and standard company employer/employee structure. When it comes to 401k plans, they provide similar features of a larger company’s 401k plan and a profit-sharing plan.
12. What are some 401k Plan Features
|401k Plans may be appropriate for||Public and private companies with stable earnings|
401k Tax benefits
|For employees: Tax-deferred growth potential and pre-tax contributions
For employers: Tax-deductible contributions
|Mutual Fund Fees||Vary by your company 401k plan design|
Key 401k advantages
|Flexible plan design
Online access to accounts through designated provider
Wide range of mutual fund options
|Available features||Employer matching contributions
401k IRS maximum contribution
|Salary deferrals up to $18,000 for 2017 and $18,500 for 2018|
401k Catch-up contributions
|Additional salary deferrals up to $6,000 for 2017 and 2018 for those age 50 or older|
|Administrative responsibilities||Filing of IRS Form 5500
Special IRS testing to ensure plan does not favor highly compensated employees
Various employee notices regarding distributions and other events
|Withdrawals||Vary by plan, fees may apply with taking a 401k loan|
13. Setting up a 401k Plan
Starting a new 401(k) plan take a company information such as: Company Census
Business owners looking to start a new 401k or retirement plan are required to provide few simple pieces of information on the company employees:
Full Name / Date of Birth / Date of Hire / Positions
Transferring an already existing 401(k) plan to another 401(k) provider generally requires:
Last Quarterly Statement
Companies with existing 401k would be required to provide a copy of your last investment quarterly statement to run a comparison.
To have your company employees enrolled into the new retirement plan, we will need a census that includes:
Full Name / Dates of Hire / Salary / Position
408(b)(2) Fee Disclosure
[Optional] Your company’s current plan provider can send the 408(b)(2) Fee Disclosure document to you.
14. What qualifies as a hardship withdrawal from a 401k Plan
There are 6 qualified hardship withdrawals from a 401k plan which includes:
- Medical care expenses for the employee, an employee’s spouse, their dependents or beneficiary.
- Purchasing a home (excluding mortgage payments).
- Tuition and related educational expenses such as fees and room and board for the next 12 months of postsecondary education.
- Payments necessary to prevent the eviction of the primary residence or foreclosure on the mortgage on that residence.
- Funeral or burial expenses.
- Certain expenses to repair damage to the main home.
Additional limitations may apply and tax penalties if criteria is not met. For more information visit: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributions.
15. How does a 401k plan loan work?
Not all 401k plans allow loans. But for those who that do allow it, 401k plans loans must be paid back within 5 years (60 months). The money that is paid back goes directly to the retirement account of the borrower. Those dollars are not taxed if the loan meets the criteria and rules of the repayments.
The IRS limitation on the maximum loan from a 401k plan is the lesser of $50,000 or half of the available amount an individual has vested in the plan. When making payments back to the 401k account, interest is to be paid as well. Within the plan documents, fees may apply when borrowing from the plan.
For more details on loans visit the IRS website here: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-loans