Commonly Asked Questions and Answers

To Help You Manage Your Plan Savings

When it comes to making the most of your retirement plan – and ultimately achieving your savings goal – the more you know about your plan’s rules and current tax laws, the better. The following frequently asked questions and answers can help you understand your plan and keep your account on track.

When must I pay income taxes on my contributions?

With a traditional 401(k) plan, the elective deferral contributions you make to your retirement-savings plan are contributed “pre-tax.” This means you don’t pay income taxes on them in the year they’re withheld from your paycheck. Present income tax laws allow you to defer paying income taxes on your contributions and earnings until the year in which you withdraw the money from the plan.

What does “vesting” mean?

Vesting refers to the percentage of your account that you are entitled to receive when withdrawing your money. Your contributions, and the earnings attributable to them, are always 100 percent vested. Employer contributions are subject to a vesting schedule defined by the plan and typically are based on your years of service.

When can I withdraw money from the plan?

Typically, you’re allowed to withdraw money, or “take a distribution,” from your plan when you experience a “benefit event.” Examples of qualifying benefit events include: termination of employment; retirement; permanent disability; or death. Some plans may offer additional withdrawal options for hardship needs (e.g., un-reimbursed medical expenses, purchase of a principal home, college tuition, or money to prevent home foreclosure) or early withdrawals.¹ Check with your employer for details.

If I withdraw money, will I have to pay income taxes?

With a traditional 401(k) plan, distributions and withdrawals are subject to federal income tax withholding and state income tax withholding, if applicable, unless they are transferred to another qualified plan or IRA. And if you’re under age 59 ½, you may be subject to an additional 10 percent Internal Revenue Service income tax penalty.² Also, checks issued directly to you trigger a 20 percent withholding for prepayment of federal income taxes.

Loans, if available under your plan, are another option for accessing your money, and they’re not subject to income taxes and penalties – as long as you repay the money. Under current laws, you can borrow up to 50 percent of your vested assets, not to exceed $50,000. If a loan isn’t repaid, though, the outstanding loan balance is subject to tax and penalties.

What’s a Summary Plan Description?

A Summary Plan Description (SPD) is a comprehensive explanation of all the features in your retirement plan – eligibility, benefits, rules and more. It’s furnished to all participants covered by a qualified retirement plan. If you don’t have a copy, ask your plan administrator for the most current version. The SPD is a particularly good source for information about your plan’s vesting, distribution options and contribution limits.

¹ Certain requirements may exist. See your Summary Plan Description for the options available in your plan.

² The early-withdrawal penalty is waived for participants over age 55 for termination of employment or early retirement (if allowed), but not for routine withdrawals.

For informational purposes only. Should not be construed as legal or investment advice, a promise of benefit or guarantee of investment performance.

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