Hi All!

Let's go over some more 401K stuff.

Traditional 401K plan is pre tax. What does that mean?

Example: Let's say you contribute $100 a week to your 401K. Let's say it has been a tough year and you want to stop making those contributions. Now that $100 will be taxed (Let's say you are in the 30% tax bracket to keep the math simple!) and the IRS takes an additional $30 out of your paycheck. That means your paycheck will go up $70. So much for the extra $100!

Do you know about Vesting?

Vesting means that the companies contribution to your 401K isn't yours until you have worked for them a certain amount of time. The company can decide if you get it: right away, in 2 years, 5 years, 7 years, 10 years. Or maybe a certain percentage of it depending on how long you have worked for the company.

Example: You have worked at the company for 1 year and put $10,000 into your 401K. The company did a percentage match and put in $2,000. Your 401K account has $12,000 in it. Your company says you have to be "vested" (work for the company) for 5 years before you can keep the employer match. You leave the company after 1 year. The company will take their $2,000 match back and you now have $10,000 in your 401K account.

Did you know that you are fined by the IRS if you withdraw money from your 401K before you turn 59 1/2 years old? Right now the penalty is 10%.

Did you know that , if you have a Traditional 401K, that you will have to pay taxes when you withdraw money?

Example: Let's say you need a new roof and it is going to cost you $10,000. You decide you want to take it out of your Traditional 401K and you are 40 years old. Let's say (To make the math easy!) that you are in the 30% tax bracket.

So how would that look? You withdraw $10,000, the IRS takes 30% for taxes and you now have $7,000. Then they penalize you for early withdrawal and you get $6,000.....ugh

Did you know you could take a loan out of your 401K?

The IRS allows 401K plans to give loans. Just so you know, not all companies do it. It depends on the 401K package you have. So what does a 401K loan look like?

You take out a loan from your 401K for $10,000. The money is taken out of your 401K so you are no longer earning any compounding interest on that money in the 401K account. The loan will be for a set amount of time, let's say 3 years. You will have to pay yourself interest on the loan. So, even though the money is no longer invested, you are still making some money off your $10,000 because you are paying interest on the loan. 

Doesn't that sound good? Here is the catch:

If you leave the company before the loan is paid off you have 2 options:

1- Pay off the loan balance in full.

2- The loan balance will be treated like a 401K withdrawal and you have to pay taxes and the 10% penalty...ugh.

Next week we are going to talk employer contributions to your 401K!

See you then!