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Return to www.Rollover.net Home                                                                                                                                               November 2013
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Are You Fully Realizing the Benefits of Your 401(k) Plan.
Years ago, many companies offered lucrative pension
programs that were a tremendous benefit to employees,
especially those who had accrued a number of years
of service.
In today’s corporate environment, however, pension
plans that are funded exclusively by companies are
becoming increasingly rare. In fact, according to research
from consulting firm Towers Watson, just 30 percent of
Fortune 100 companies currently offer a defined benefit
pension plan to new salaried employees. And, with
uncertainty surrounding the future of Social Security,
retirement planning is more important than ever. A 401(k)
plan can help.
The 401(k) is a defined contribution retirement plan
named after a section of the Internal Revenue Code. With a 401(k) plan, you can usually contribute a
portion of your paycheck on a pre-tax basis, and earnings on contributions are allowed to grow on a tax-
deferred basis until you withdraw the funds, usually at retirement.
Whether you’re first considering enrolling in your company’s 401(k) or have already begun making
contributions to a plan, it is important to fully understand some key aspects of 401(k)s.
The Earlier, the Better
The earlier you begin contributing to your 401(k), the better. And if you’ve already started, it’s important
to keep contributing on a regular basis. Procrastinating can have a big impact on your retirement savings
over the long run. Consider the following example:
Katie and Susan both work for the Widget Company and both earn a salary of $50,000. Katie begins
contributing 10% of her salary to the company’s 401(k) plan at the age of 25 and continues to do so until
her retirement at 65. During this 40-year span, Katie has received an average raise of 3% per year, and
her investments earn an average annual return of 6%. At age 65, Katie will have $2,074,326. Susan also
contributes 10% of her salary, but waits until she is 30 years old to begin doing so. During Susan’s 35
years of contributing to her 401(k), she, too, receives an average 3% annual raise and earns an average
return of 6% on her investments. At age 65, Susan will have $1,329,930 in her account. As you can see,
had Susan begun investing earlier in her career, as Katie did, she would have earned an extra $744,396.
Of course, this is a hypothetical illustration only and does not reflect actual performance of any particular
investment.
Currently, 401(k) plan participants can contribute up to $17,500 annually. Furthermore, individuals age
50 or over in 2013 can make an additional “catch up" contribution of $5,500 annually. And remember,
your contribution to your 401(k), up to the allowable limit, is deducted from your paycheck before taxes
are withheld, thus reducing your overall taxable income.
Investing Made Simple
One of the many advantages of a 401(k) plan is the ability to invest a set percentage of your salary
or dollar amount on a regular basis. By setting up an automatic payroll deduction for your 401(k)
contributions, you will be able to “pay yourself first" by putting money in your 401(k) before you
could be tempted to spend it elsewhere.
Investment Strategist
Investment Strategist
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And what could make investing simpler than receiving free money. With many 401(k) plans,
participants receive contributions from their employer, often a percentage or dollar match of the
employee’s contribution.
Hypothetically, let’s return to Katie, who is working for the Widget Company. As you recall, Katie
was contributing 10% of her $50,000 annual salary to her 401(k), with an annual average increase in
salary of 3% per year and an average return on investment of 6%. From Katie’s very first contribution,
let’s assume that the Widget Company offered her a matching contribution of 50%, up to the first 6%
of compensation she defers. At age 65, the value of Katie’s 401(k) could be increased by $622,298,
simply from her employer’s matching contribution. For many investors, this is more than enough
reason to take advantage of their company’s 401(k) plan.
Investing Your 401(k) Dollars
Once you’ve made the decision to participate, you’ll be faced with a more difficult decision — how to
invest your dollars within the plan. Most plans typically offer a selection of mutual funds. Determining
how to properly allocate your money will be based on a number of factors, including your investment
time horizon and tolerance for risk. If you’re uncomfortable selecting your investment options on your
own, it may be a wise idea to consult with your Financial Advisor for assistance.
Accessing Your Funds in an Emergency
Typically, the money in your 401(k) cannot be withdrawn until you’ve quit, died, or retired, and early
withdrawals may incur penalties. Some employees may be hesitant to invest in their company’s 401(k)
plan out of fear that they may need to access that money before retirement. However, most 401(k)
plans do allow for early withdrawals under certain circumstances. For example, some plans will allow
the employee to make withdrawals after age 59½ or take a loan from their 401(k), repaying a small
amount at each pay period. Before taking a loan from your 401(k), however, it is important to note that
the IRS requires that the loan be paid immediately upon separation of service. Otherwise, the loan will
be considered a taxable distribution.
In addition to loans, many 401(k) plans allow for hardship withdrawals based on “safe harbor"
guidelines set forth by the Internal Revenue Service. Such hardships can include medical expenses
for the employee, spouse, or dependent; the purchase of a primary residence (excluding mortgage
payments); payments for higher education for the employee, spouse, or dependents; or to prevent
foreclosure on the employee’s primary residence. It is important to note that hardship withdrawals are
subject to ordinary income tax and the 10% early withdrawal penalty.
If you’re concerned about how much of your income should go towards your 401(k) and how much
should be invested in more liquid investments, discuss these concerns with your Financial Advisor,
who can help you determine a proper asset allocation and distribution among all of your investments.
Separation of Service
Inevitably, there will come a time when you will no longer work for your current employer, whether
you’re facing retirement, downsizing, or are simply moving on to a better opportunity elsewhere. When
it comes time to leave your employer, you’ll have a few options regarding what to do with your 401(k).
Typically, those options will include leaving the money with your former employer’s plan (if the balance
is greater than $5,000), rolling over the money to your new employer’s plan (if you’re not retiring and
your new employer’s plan allows for rollovers), rolling the money into an individual retirement account
(IRA), or taking a lump-sum distribution. Each of these options has advantages and disadvantages
that must be considered carefully before making a decision.
For some, keeping the money with the former employer tends to be the simplest option, if not necessarily
the wisest. By maintaining a 401(k) with a former employer, you may be able to take advantage of fee
discounts negotiated by the plan provider; however, you won’t be able to contribute any additional
dollars to the plan, and you may have fewer investment options than you would with an IRA.
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Furthermore, if you have worked at a number of different companies during your career, you may
find it cumbersome to deal with multiple account statements and keep your address and beneficiary
information for each account up to date. Rolling your money over to a new employer’s plan can be
a good idea if you’re going to continue investing in the future, as all of your funds will be held in a
single account. Again, however, you may find more investment options are available with an IRA.
If you choose to roll over your money to an IRA, you’ll want to be sure to request a direct rollover
to avoid unnecessary penalties or taxes. This means that the distribution check from your previous
employer’s retirement plan will be made payable to the custodian of your IRA account. Your Stifel
Financial Advisor can provide you with specific instructions for the check.
One of the most certain mistakes you can make is receiving a lump-sum distribution before age
59½. Early withdrawals are typically subject to both ordinary income taxes and a 20% withholding
for federal income taxes due. And, a 10% penalty is generally assessed if you are younger than 59½
or have separated from service before the calendar year in which you reach age 55. Ultimately, the
losses you could incur on cashing out your 401(k) before retirement can be substantial.
Taking the First Step
If you’ve already begun participating in your company’s 401(k) plan, you’ve made an important step
in planning for the future. However, if you’re not taking advantage of this benefit, you may want to
talk to your employer’s human resources department to find out more about their specific plan and
whether there’s a company match. After you’ve received the proper paperwork and information from
your employer, schedule an appointment with your Stifel Financial Advisor to help you determine
how to best utilize this attractive retirement savings vehicle.
Helping Your Employees With Their Retirement Plan
If you own a business, or are involved in
selecting and planning your company’s
employee benefits, it’s important to consider
the benefits a 401(k) plan can provide both
the company and its associates. For many
businesses, a 401(k) plan can be an excellent
way to attract and retain quality employees.
If you’ve already established a 401(k) for
your firm, or are planning to do so, there are
a number of responsibilities involved with
maintaining your company’s plan. You’ll want to make sure that your employees have
a variety of attractive investment options from which to choose, and be able to provide
employees with the training and education they need regarding the investments.
Furthermore, you will also need to ensure that the company and the plan provider
administer the plan properly and at a reasonable cost.
Stifel can help your business offer a 401(k) package with competitive investment
options, record-keeping, administration, and employee education services. If you
would like a free, no-obligation review of your company’s existing plan, or information
regarding establishing a new 401(k) plan, contact your Stifel Financial Advisor today.
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One Financial Plaza | 501 North Broadway | St. Louis, Missouri 63102
Stifel, Nicolaus & Company, Incorporated | Member SIPC & NYSE | www.stifel.com
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