Continuing the topic of NOT participating in your 401(k) at work, here are some answers to last week's questions.
Q: Are you eligible to participate?
Some companies have an employment requirement (say, six months or a year) before employees can sign up for a 401(k). Check with your boss or human resources –- are you eligible?
Q: Is there an offer of money to help you save for retirement? Is there a limit of how much money the employer is offering? What do you need to do to qualify for the top limit?
Most likely, your 401(k) has a company contribution.
According to an Investment Company Institute study (tinyurl.com/u6r7s8e2), most companies offer some sort of employer contribution when you participate in the company's 401(k). If the plan has a match feature, the company's contribution is tied to your contribution.
The most common match, according to FINRA (the Financial Industry Regulatory Authority, which regulates the brokerage industry), is a dollar-for-dollar match up to 3% of an employee's salary. Some plans might offer variations, such as matching 100% of the first 3% of an employee's salary, then a 50% match of the next 3% of an employee's salary.
Ask for a summary plan description to get answers on how your plan works. We'll talk about contribution limits in next week's column.
Q: Assume you "take" the money offered by the employer -- are there any limitations? For example, what if you change jobs? Do you have to do anything special to keep the money your employer is offering?
Employer contributions can have strings, called "vesting." Vesting is all about time on the job. Some contributions are "fully vested," meaning once you receive the company contribution, it's yours, even if you quit. Others "vest" over time according to a vesting schedule. What is the vesting schedule of your plan?
To read more about vesting, see tinyurl.com/xykm38uc.
Q: What 401(k) actions can you take (or not take) that will influence your W-2 income for income tax purposes?
Your W-2 income will be lower if you decide to make pre-tax salary deferrals. If you contribute $1,000 pre-tax, your W-2 income will be $1,000 lower. As a result, your income tax bill will be lower. If you contribute to an after-tax 401(k), there is no impact on your W-2 income.
Q: What W-4 actions can you take that influence your regular paycheck if you do or don't contribute to your 401(k) on a pre-tax basis versus an after-tax basis?
As mentioned, if you contribute to your 401(k) on a pre-tax basis, your W-2 income will be lower by the amount of your contribution, which is technically called a "salary deferral."
That means that your W-4 tax withholding allowances need to be double-checked to make sure you are not withholding more than you need to cover your tax bill.
How can you tell if that's happening? Easy. If you get a tax refund, your W-4 is telling the payroll department to send the U.S. Treasury more money than you need to cover your tax bill. Of course, taxes can vary year by year, so watch for differences, such as deductions, before taking action.
When you decide to contribute to your 401(k) pre-tax, refigure your W-4 with the help of your payroll department or accountant with this objective: Instead of getting a refund, you want to account for your new, post-contribution, W-2. Your W-2 will be lower due to your contribution; your paycheck will be higher due to your W-4 adjustments.
This is probably the MOST important step to take for anyone who thinks he or she cannot afford to participate in a 401(k).
We'll pick up on the rest of the questions next week. In the meantime, what are you finding in your search for answers?
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION