“Will my 401(k) still be there when I leave?”
I got this question last week from someone I work with. It’s her first time having access to a 401(k) through work, so naturally, she has a lot of questions.
But it got me thinking.
401(k)s are pretty complicated - and each one can have very different rules.
So I thought it would be a good topic to write about. Here are some things you didn’t know about your 401(k) (and some things you probably did).
Your 401(k) might not be a 401(k).
There are a number of different types of retirement accounts that employers can offer. Often, people miscategorize other retirement plans as 401(k)s. You may have a 457, a 403(b), a SIMPLE IRA, or something else. It’s important to understand what TYPE of plan you have access to. This post is about 401(k)s, so if you actually have a different type of account, a lot of this won’t apply.
Your contributions are always yours.
The question at the beginning of this post has an answer that’s almost always “yes.” If you’re contributing to your 401(k), your employer CANNOT take those contributions away from you if you leave. The same cannot be said for any amount your employer contributes as a match or nonelective contribution (NEC). These contributions may or may not be subject to a “vesting schedule.”
The employer contributions might get better the longer you stay.
Sometimes, employers increase their contributions based on something like each employee’s years of service and age. This should be a factor you consider if you’re thinking about taking a new job with a different company.
Vesting schedules are based on your years of service, NOT when the contribution was made.
When employer contributions “vest,” it means that you get to keep them if you leave the company. A vesting schedule tells you when the employer's contribution becomes vested (yours). Your contributions are always 100% vested, but you may not get to keep ANY of the employer portion until you’ve completed 3 years of service (3-year cliff vesting schedule) or only a portion for up to 6 years (6-year graded vesting schedule). Employers can choose to allow their contributions to vest sooner, but they cannot be more restrictive than one of these two schedules.
There might be a couple different vesting schedules.
There are two main types of employer contributions to a 401(k) - a match, which the employer only contributes if YOU are making contributions, and a nonelective contribution (NEC). NECs may be described as “profit sharing” or just a flat percentage of your pay. Employers can assign different vesting schedules to the match and NECs of the same plan; for instance, sometimes the match is 100% vested immediately, but NECs vest over a 3-year period.
Your maximum contribution isn’t limited to your employer’s match.
Sometimes I hear this from people: “I’m maxing out my 401(k) at 5%.” That’s usually not true, but some people think that you can’t contribute more than your employer matches. Normal employee contributions are limited to $23,000 in 2024 ($30,500 if you’re 50 or older), and you may even be able to make additional, after-tax contributions (see point number 9).
You can probably make Roth 401(k) contributions.
Unlike Roth IRAs, there are no income limits for making Roth 401(k) contributions. Not every plan offers a Roth 401(k) option, but it’s becoming more common. Some plans even allow you the option of having the match be made into a Roth account - but note, this will increase your taxable income ABOVE your salary as the employer contributions will be added to your taxable income.
You can make Roth conversions in some plans.
If you have a low-income year, you may be able to convert pretax money in your 401(k) to Roth without taking it out of the plan.
You may be able to make MEGA backdoor Roth contributions.
The maximum TOTAL contribution to a 401(k) in 2024 is $69,000 for people under 50 ($76,500 if you’re 50 or older). If you’re under 50, $23,000 of that is for employee contributions (either Roth or pre tax - see point number 6), and the rest is the limit for employer contributions. But some employers allow you to fill up the rest of it with after-tax, non-Roth contributions. If the plan allows that AND in-plan Roth conversions, you can make after-tax contributions up to the limit, then convert the after-tax dollars to Roth. Any after-tax dollars converted to Roth don’t create a tax liability, so it’s effectively a way to get more money into the Roth 401(k) to grow tax-free.
It’s possible that the maximum contributions noted above may be higher than highly compensated employees would be allowed to contribute.
There are certain rules for 401(k)s to prevent highly compensated employees from reaping significantly more benefits from the plan than the rest of the employees in the plan. Most people don’t run into this situation, but it’s important to understand if you’re a business owner or a highly compensated employee. If you’re a highly compensated non-owner at a small company, you may be able to persuade your employer to adjust the plan to allow you to take full advantage of the listed limits instead of being subject to the lower limits enforced by the rules. This is where the art of plan design comes in.
Your 401(k) might be cheap, but it may also be expensive.
There are a number of different types of fees that get layered into a 401(k) plan. There’s the expense ratio of the investments, which can vary widely (I’ve seen as little as 0.02% and as high as 1.33%). Then there can be administrative fees - these could be a flat, periodic fee, or they could be a percentage of account value. Sometimes there are also advisory fees - usually a percentage of the account balance, and sometimes there’s more than one advisor getting paid that way on one plan. All of this is available to you as a participant, but it can be really hard to find. It could be in the Summary Plan Description or the Annual Fee Disclosure.
You may have more flexibility with investments than you think.
You’re usually limited to the investment menu provided to you, but sometimes you can manage it yourself with access to far more funds. This is most common if you have a Fidelity 401(k) (they call it BrokerageLink).
You may be able to take a loan from your 401(k).
Usually, loans must be paid back with interest within 5 years or before you roll the funds out of the 401(k). However, if you use a loan from your 401(k) to buy a primary residence, you may be able to pay it back over a longer timeframe. Typically, you can take a loan for up to half of your 401(k) balance, with a maximum of $50,000. The interest that you pay on the loan is added back to your account, but you don’t get a deduction for loan payments, even if it’s into a pre-tax account. This means that you may have a double taxation issue with interest paid back after-tax that will be taxed upon withdrawal regardless. It’s important to understand the true cost.
You may be able to access your money sooner than you think.
Some 401(k)s allow penalty-free distributions at age 55 instead of the normal retirement age of 59.5 that applies to most other retirement accounts.
Pre-tax 401(k)s aren’t subject to the aggregation rule for Roth conversion purposes.
If you make too much money to contribute directly to a Roth IRA, you may be able to make after-tax contributions to a traditional IRA, then make a Roth conversion with those dollars. This is often referred to as a backdoor Roth IRA. The benefit is that you don’t have to pay tax on after-tax IRA conversions because you didn’t get a deduction for the contributions in the first place. However, if you have other, pre-tax IRAs out there, the IRS views the conversion as a pro-rata conversion of the aggregated IRA balance. This doesn’t apply to 401(k)s.
You may be able to roll IRAs or old 401(k)s into a new 401(k).
This may be beneficial from a consolidation perspective, but it can also allow you to be more tax efficient by allowing backdoor Roth contributions to be tax free. For this reason, you should generally at least consider moving pretax IRA or 401(k) dollars into a new 401(k), but it rarely makes sense to do this with Roth dollars, since Roth IRAs are generally more flexible than Roth 401(k)s. Unfortunately, some 401(k)s don’t allow for rollovers into the plan, so this isn’t available to everyone.
If you’re still working when you’re RMD age, you may not have to take RMDs from your active 401(k).
The IRS doesn’t want pre-tax money to escape taxation forever, so at a certain age, they make people withdraw a certain amount of their pretax money as a required minimum distribution (RMD). If you’re still working and don’t own a significant portion of the company, you may be able to continue to defer your RMDs. I know this one is vague - that’s because rules have changed a bit recently, so if you think this might apply to you, talk to a professional.
Conclusion
Your 401(k) (or other retirement savings plan through work) is probably somewhat complicated. A financial planner can advise you on the best course of action and help you make sense of it all. If your financial planner doesn’t advise on your 401(k), you may want to look for someone who takes a more comprehensive approach.
As always, keep in mind that you don't have to go it alone. I’m Austin Preece, a financial planner in Eau Claire, Wisconsin, and I work virtually with people across the US. Check out my website to see what it's like to work with me and reach out if you have any questions.
If you found this post helpful, help spread the word! Share with friends and family that you think may benefit as well. But remember, this is solely for educational purposes - it's not advice.
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