401(K) Day: 11 Facts to Test Your Knowledge

By Heather Hoffman, Marketing and Communications Specialist

09/2024

Did you know there’s a National 401(k) day? It was created in 1996 by the Plan Sponsor Council of America, and it’s recognized on the Friday after Labor Day. Take this day to remind yourself of some key points of a 401(k). Some facts you might know, some you might need a refresher on, and some you might have never heard of.

1. 401(k)s are available through your employer, and they require action once you leave the job.

401(k)s are only available through your employer. If you want to contribute to a retirement account that’s not connected to an employer, you will need to open an IRA. When you leave your employer, you have a few options on where your 401(k) can go. Some employers let you leave the plan invested with them, but you cannot make additional contributions. You can also move your funds into an IRA, or you can move it into a new employer plan if allowed. You have the choice to just withdraw it as cash, although this stops any investments, and you will need to pay applicable taxes and penalties.

2. 25% of the total amount of 401(k) assets are in “forgotten” accounts.

Wherever you choose to move your 401(k), it’s better than forgetting about it entirely. In May of 2023, it was estimated there were 29.2 million forgotten 401(k) accounts, totaling $1.65 trillion. This is about 25% of the total amount of 401(k) assets. Many plans have automatic enrollment, which doesn’t require active action. This could contribute to leaving a 401(k) behind.

3. Sole-employee business owners can contribute to a 401(k).

A one-participant 401(k) plan allows for a business owner with no employees (besides a spouse) to obtain a 401(k) plan. With this plan, the owner can contribute as an employee and as an employer. The other rules of 401(k)s apply.

4. Employers and employees must follow contribution limits that can change from year to year.

For 2024, you can contribute $23,000. If you are 50 years or older, this raises to $30,500. This limit is only for your employee contribution. With your employer match, the total for 2024 cannot exceed $69,000, or $75,600 with catch-up contributions. This limit is across all of the 401(k) accounts that you have.

5. A loan from your 401(k) does not show up on credit reports.

If your plan permits, you can take a loan from your 401(k). The maximum loan allowed by the IRS is the lesser of $50,000 or 50% of your vested balance. These loans are appealing to some because they don’t require a credit check, and they don’t appear on your credit report. It does come with some downsides. With this loan, you are eliminating the chance for that money to grow until you pay it back. If you quit or get fired, you are often required to pay back the remainder of the loan immediately. If you cannot, then it is considered a withdrawal, and you will pay taxes and a potential penalty.

6. You cannot withdraw your money at its full value until you reach a certain age.

There are penalties for taking money out of your 401(k) if you do it too young, and there are penalties for not taking money out if you do it when you’re older. Money in your 401(k) cannot be withdrawn at its full value until you turn 59.5 years old. If you make withdrawals before, it is subject to taxes and a 10% early withdrawal penalty.

7. You cannot withdraw your money at its full value if you wait too long after you reach a certain age.

When you turn 72, 73, or 75, (depending on your birth year) you must begin to take Required Minimum Distributions (RMDs.) For your first year of RMDs, you must take it by April 1^st of the following year from when you reach the required age. For all other RMDs, you must take it before December 31^st. If you wait to take your first RMD until the deadline, then you will need to take two RMDs in that calendar year. If you fail to complete the withdrawal, you could be subject to a 10-25% penalty of the amount that’s not withdrawn.  Roth 401(k)s and 403(b) plans will no longer require RMDs in 2024.

8. Under a specific circumstance, you can start penalty free withdrawals at 55.

You can start taking withdrawals, penalty free, before 59.5 under a specific circumstance. If you retire between 55 and 59.5, you can take 401(k) withdrawals from the company you just left. But if you decide to get another job, you will not be able to take penalty free withdrawals until you turn 59.5.

9. Associated fees can come in multiple forms.

Usually, you will need to pay some kind of fee with a 401(k) account. These can come in a variety of forms such as plan administration fees, investment fees, individual service fees, sales charges, management fees, etc. 

10. Your company can make you wait to enroll in their 401(k) plan, and their contributions aren’t always yours to keep.

Every company has their own policy on when you can begin contributing and when the employer contributions become fully vested (or owned.) The longest a company can wait to allow enrollment is 18 months, and the longest they can wait to make employer contributions fully vested is 6 years. Typically, the waiting periods are shorter than this.

11. Certain events can allow for penalty free withdrawals before you reach 59.5.

When certain events happen, you can take early withdrawals without the 10% penalty. For qualified birth or adoption expenses, you can withdraw up to $5,000 per child. If a federally declared disaster causes economic loss, you can withdraw up to $22,000. Victims of domestic abuse can withdraw the lower of $10,000 or 50% of their account. Each year, you can withdraw $1,000 for personal or family emergencies. For unreimbursed medical expenses, you can withdraw that amount that exceeds 7.5% of your adjusted gross income.

With these 11 facts, you can help educate your family, friends, coworkers, and everyone else about 401(k)s. If you want assistance setting up a 401(k) for your business, or advice on how to manage it, visit www.convergence-financial.com. 

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.