Couple of quick questions about 401k . . .?
Couple of quick questions about 401k . . .?
I've never been very investment savvy so bear with me. I'm trying to get myself together. I just switched jobs & my new company automatically enrolls me in a 401k (unless I decline) at 3%. I understand the benefits of having this so I'm going to do it. I get paid 2x's per month. But a few questions . . .
It's pretax right? And my health insurance ($700/mo) is pretax as well. So say my check is $3,000. My health insurance ($350 for that period) comes out first??? And then they put in 3% of what's remaining?
And if I get laid off . . . what happens to that money? I ask because my industry is notorious for its ups & downs. My co-worker got laid off 5 times in one year.
Sorry if the questions seem simple but I have never really had any education about investments so I wanna make sure I know what I'm doing. Thanks!!!
Answers:
Overnight: Its pretax. The 3% will be of your total gross pay not on the portion that's left after health ins.
Also if you get laid off, anything you put in out of your check is yours. You will have a few months to decide what you want to do with it. The best thing to do would be to do a "roll over" into an IRA which you would have. A less desirable option would be to cash it in. I say less desirable becuz there will be penalties and tax consequences. If you roll it over to an IRA its all good.
Now for the portion your employer "matches", if you are lucky enough to have that-- it may or may not be yours, depending on if they make you "vest" in their portion or not. Typically that's a few years before that portion is yours. The money you put in out of your check is always yours though.
2011-01-22 20:30:16
2011-01-22 20:30:16
WHAT: Don't worry, your question is an honest question.
Investing into a 401k is great. And a very good plus that the company matches your investment. If your check is $3000, then you will have them withhold $90 and immediately you make an additional $90 from the match (that is a 100% you just made on your investment). Yes, it is pretax, so at this point your $3000 is now lower by the $350 and the $90. So say it is now $2560. That is what will be taxed.
If you get laid off, you can choose to A) leave it there for a short while, to see if you get rehired, or B) see if your next employer will allow you to roll it into their plan. If not than C) contact a good mutual fund, and they can help you to roll it into a plan there....such as Fidelity or American Funds, or your bank.
2011-01-22 20:36:48
2011-01-22 20:36:48
Chris: Yes, it's pretax - you don't pay tax on the money in a 401k until you take the it out. The 3% percent you mentioned would be figured on your gross. If you leave the company, any money you've contributed is yours to take. If the company is also putting money into your account, you'd need to look at the vesting schedule to see what percent you can keep. A vesting schedule shows what percentage of their money you get to keep by how many years you've worked there. If the company matches at some level - such as they put in 50 cents for each dollar you put in up to 3% of your salary - you want to at least choose that percent - so you are not leaving free money on the table. Since you're putting it away for retirement, you're really not supposed to take it out before then and can be penalized if you do - but they do have exceptions to the rule - such as needing to use it for medical bills.
Hope that helps some.
2011-01-22 20:39:45
2011-01-22 20:39:45
ChoDuffield: The first 3 covered it pretty well. The only thing I'd add is that you aren't always required to do anything with your 401k when you leave. My wife still has one from an ex-employer from 7 years ago. I think the concept is you have more investment options if you move it to an IRA, but you don't have to. Now, I had one that was worth less than $5k when I left a company. They required me to roll it over to an IRA or they would cash it out for me. The options and size they will manage are probably plan specific.
2011-01-22 20:48:16
2011-01-22 20:48:16
Chosen Answer
Reena: It is pretax money... but they take out the 3% for the 401K first, then they deduct your health insurance premium $350 and the rest of your pay check is taxed at what is left. So the 3% is done on your whole gross check... not after they deducted the health care premium. (btw... do yourself a favor and up that percentage to at least 5%) You won't see a big difference in the net pay because the more they take out before they tax the rest... the less they can tax to begin with. If you get laid off... the 401K stays put... and you can restart your contributions when you get rehired. If you don't think you will be rehired you can roll the money into an IRA and keep it there. Do not cash out every time you switch employers or get laid off.... the 401K is your retirement money. It is supposed to stay untouched until you retire. P.S. They will ask how you want to invest your money.... for now choose 60% Stock options and put the rest in Bonds. There will be a list of funds you can choose from and you should get a performance report on each fund. Pick what you think looks good and just diversify. Have at least 5 different funds with each getting 20% of your contribution money. This is a very "simplified" way of doing it but if you have no idea what you are doing..... it is better than putting everything into a money market account that hardly accrues any interest.
2011-01-22 21:03:38
Reena: It is pretax money... but they take out the 3% for the 401K first, then they deduct your health insurance premium $350 and the rest of your pay check is taxed at what is left. So the 3% is done on your whole gross check... not after they deducted the health care premium. (btw... do yourself a favor and up that percentage to at least 5%) You won't see a big difference in the net pay because the more they take out before they tax the rest... the less they can tax to begin with. If you get laid off... the 401K stays put... and you can restart your contributions when you get rehired. If you don't think you will be rehired you can roll the money into an IRA and keep it there. Do not cash out every time you switch employers or get laid off.... the 401K is your retirement money. It is supposed to stay untouched until you retire. P.S. They will ask how you want to invest your money.... for now choose 60% Stock options and put the rest in Bonds. There will be a list of funds you can choose from and you should get a performance report on each fund. Pick what you think looks good and just diversify. Have at least 5 different funds with each getting 20% of your contribution money. This is a very "simplified" way of doing it but if you have no idea what you are doing..... it is better than putting everything into a money market account that hardly accrues any interest.
2011-01-22 21:03:38