401K questions from a young and confused person?

401K questions from a young and confused person?
Okay so this is an area I know pretty much nothing about so I will probably need lots of guidance..... I will start off by saying that I'm young(22) and while keeping the future in mind is not a bad idea, things like paying off the credit card balance I accrued during college before my student loan grace period is over, is a much higher priority than planning my retirement. Not an attitude I want to continue but for this first year I'm on my own I think that might be ok to let slide. (Just this year!) While I was in school I worked 30 hours a week to help pay my way, and the job I worked actually had some pretty nice benefits. It was a union job and because I worked just enough hours, they gave me a 401k which was built from profit sharing by the company I worked for. So now there's a fairly decent chunk of money in there. I never paid much attention to it until recently and I really don't know what that means. My questions are: A) Could I potentially withdraw some or all the money to pay off debts and what kind of fees/penalties/taxes would be associated with that? I know this will vary depending on the conditions of my account but can somebody give me a good general direction on this, perhaps telling me what's normal and what's not and point towards some trustworthy resources? B) As I mentioned, I just finished college, meaning I'm looking to make some career changes. The company that gave me this 401k was really great to me and all but there isn't room for growth and it really isn't at all relevant to my degree. Hopefully soon, I will have to quit this job for something that uses my degree. My question: What happens to this 401k when I leave this job? I must sound like a total moron but if I don't ask but I won't ever learn. I was hoping that somebody would be on here who was wiser than me and could at least begin to point me in the right direction or tell me who I would need to talk to. Thanks in advance everyone!


Answers:

Chosen Answer
Jessica:  No, you don't sound like a moron. When it comes to your financial future, ignorance is not bliss so good for you!! A) If you are at the job with the 401k and want to withdraw a loan and you then LOSE your job or QUIT then you will have 60 days to repay the loan in full. Overall, reputable finanial experts will tell you that it is NOT a good idea to take out a loan from a 401K. B) When you get new employment at another company you can simply roll your 401K into your new one. However there is a short time limit that you can do this WITHOUT fees being imposed. Regardless, your 401K is your money forever. Also, consider opening a ROTH IRA besides just having a 401K. What is a ROTH IRA? It is a retirement account that is taxed now oppose to being taxed 40+ years later when you are at retirement age and taxes are higher. Would you rather your money be taxed now at say 8% or 40 years later when taxes are higher? Obviously now. The 401K is tax free money now, however it will be taxedwhen you withdraw money during your retirement years. The Roth IRA has a yearly contribution maximum of $5,000 only. Therefore, only contribute what your employer will match you for the 401K and contribute the rest to a ROTH IRA. Example: If your company matches you 6% then contribute 6% into your 401K and the remainder into your ROTH IRA. Also, I recommed the Dave Ramsey "Total Money Makeover". Good easy read and principles to have for life. He will teach you (as he has taught me and millions) how to pay off debt, save your money, and so fourth. You can find it on Amazon.com. I wish I read this book years ago. He also comes on Fox Business every night for an hour. Good Luck and Best Wishes.
2009-08-05 11:53:58
Heather:  A) Your 401K account is considered taxable income. You will be throwing away a ton of money if you take an early withdrawal. Normally, 20% for Federal Taxes will be withheld if you withdraw it, and I know that in the State of VA, you should request another 4% withheld for State Taxes.; not to mention the 10% early withdrawal. If you withdraw part of the money through a loan, you will be responsible for paying it back within a certain time frame. You probably will not have much money for your debts once you subtract all the penalty fees. I would also caution you against taking a loan from your 401K because of the interest involved. You will have to pay it back within a certain timeframe. If your 401(k) plan allows loans (most do), you can borrow up to 50% of your vested account balance or $50,000, whichever is less. You usually have a maximum of five years to repay the loan. Unless you repay the loan, it is considered a premature distribution. You would owe federal and state income taxes as well as that 10% penalty if you are under age 59 1/2. Determine what federal tax rate you are paying. Once you take the money out of the 401k it is considered income. Because the withdrawal is from money that is pre-tax, it needs to be taxed. The federal income tax rate runs from roughly 15 percent to 35 percent for the majority of Americans. Check your previous tax return to find yours. Also, watch out that the withdrawal you are taking doesn't bump you into a new tax bracket. Step 2 Check the state income tax you paid the previous year. Unfortunately that amount of money needs to be removed as well. Step 3 Add 10 percent to the amount of the withdrawal you are making to get your final answer. For instance if you are taking $30,000 to buy a car and are in a 20 percent tax bracket in a state with 5 percent income tax, your $30,000 removal will only net you $20,000. You lose $3000 for the penalty, $6000 for the federal income tax and $1000 for the state income tax. B) If you are fully vested in the company, your 401K can continue to grow until you reach retirement age. You do not have to move your money when you change jobs. You could also roll the money into your new employer's 401K plan or into an IRA account. When you leave the company they will send you paperwork about your 401K and what options you have. It would be good for you to ask lots of questions so that you fully understand all the penalties of early withdrawal. Early distribution is reported to the IRS so you will be responsible for any taxes.
2009-08-05 14:10:09
Mary:  It is very important that you have the rollover money paid directly to the new plan sponsor if you wish to avoid taxes and penalties. My article http://www.associatedcontent.com/article/1994040/rollover_ripoff_how_the_government.html?cat=3 tells you exactly why. Do not liquidate your 401k money because the taxes and penalties will be ruinous. Also, due to compounding, the money that you put in early in your life is the most valuable money that you will ever have. Better to save less money in the future than liquidate what you have and try to get it back. In fact, if you ever want to have real money, have an IRA and a retirement account set up every time you work and have weekly deposits made out of your paycheck. Live without this money. That way you will have money for your old age and you will train yourself to live on less. If you lose a job, it's easier to adjust your standard of living than when you spend every penny and borrow more to live.
2009-08-05 16:12:14