Few misconceptions cleared about 401(k) Retirement Plan
Not all 401(k) plan participants are completely educated about their 401(k) plans and really do have a lot of misconceptions about it. So how much do you really know about your 401(k) plan? Let’s find out.
The entire 401(k) account is mine when I quit the job: This is one of the biggest mistakes one could make in his/her 401(k) retirement planner. This may OR may not be true, depending on your 401(k) plan’s vesting schedule.While your own (Roth/pre-tax) contributions to the plan are always yours to keep, it is not always the case with employer contributions. While some employer contributions are also owned by employees, there are others which require employees to have up to 6 years of service before they’re entitled to employer contributions completely.
The 401(k) is a great method to save for first home, college, etc.: Many people think that 401(k) plans can be used for other major things such as paying for a down payment for a home or for college tuition. However, 401(k) plans should be solely focused on retirement nest eggs and savings. If you want to fund your child’s college education, try the 529 plan, but leave your 401(k) alone because if any dire need arises in the future, you’ll be left without savings.
Contribute to my 401(k) plan doesn’t allow me to contribute to an IRA: Employees need to understand that 401(k)s and IRAs are different and their contributions to a 401(k) plan have no effect on if they wish to contribute to a Roth or a traditional IRA. However, one needs to remember that their/their spouse’s participation in a 401(k) plan, depending on their joint income, may unfavorably impact their capability to deduct contributions to a traditional IRA.
Minimum contributions to 401(k) are the maximum company match: Many employees believe that they should contribute to the 401(k) just only how much the company contributes, which is 6%. The result is just 6% in employee contributions, which should ideally be an average of 15% at least, and forget about how much the employer is contributing.
Two jobs with two 401(k)s allow me to defer up to $18,000 per plan: This is a smooth assumption on part of the employee, but that is not the case. The limit is $18,000 deferment limit on ALL your employer plans including the 401(k), Simple plans, SARSEPs and 403(b)s (excluding 457(b)s). If you’re lucky enough to have both a 401(k) and a 457(b), you can defer up to a maximum of $36,000 in 2017 (excluding catch-up contributions).