Sooner is always better when it comes to retirement planning, and that’s why you should go over your retirement plan with your employer as soon as you’re hired. Don’t just set your 401k contribution without asking any questions. When you sit down with your employer to talk about retirement, here are five important things to ask:
There are several different types of funds that can be in your plan’s investment lineup. The safest option is a money-market fund, which typically has the lowest growth but also protects the money you put into it most effectively. Other options include small-cap, mid-cap, and large-cap equity funds, which invest in small, medium, or large companies. Smaller companies have a higher risk to reward ratio. Ideally, you want a balanced investment lineup with several different types of funds.
Every employer is different in regards to matching 401k contributions, but each has a maximum amount that they will match. For example, your employer may match up to 5 percent of your salary. This means that whether you put 5, 10, or 15 percent of your salary towards your 401k, your employer will contribute an extra 5 percent. Other employers may have a dollar matching limit. There are also limits regarding your own 401k contributions, so make sure to ask about those, as well.
When you put money into your 401k, it’s yours. When your employer puts money into your 401k by matching your contribution, it’s yours – after you’re vested, which may take a few years. If you leave your job before you’re vested, you may only receive some or even none of the money your employer contributed to your 401k. Keep this in mind if you decide to leave your job, as it may be worth it to stay a bit longer if you’re close to being vested.
Ideally, you want to avoid withdrawing from your 401k until your retirement. If you choose to withdraw your money from your 401k before then, you will lose quite a bit of money in fees and taxes. However, certain 401k plans allow loans if you’re going through a financial hardship or emergency. It’s always better to have an emergency fund for these situations, but just in case you end up needing to withdraw from your 401k fund one day, ask your employer what the withdrawal policy is.
A loan from a 401k is like any other personal loan, as you sign a contract and repay the loan in monthly payments. You can borrow a maximum of $50,000 or half of your current vested amount, whichever is less. While the IRS lists several qualifying financial hardships, it’s your employer that decides if your situation meets the hardship guidelines.
In researching your employer’s 401k plan, you may end up feeling that it’s not very good, and that there are better plans out there. See if your employer has other types of plans available that better fit your needs. It’s good to go through your employer for your 401k, because the contribution matching is basically free money for you. If you want to go elsewhere, remember that you can open up a 401k account on your own through a provider. They in turn can advise you on how to manage your account.
It’s always important that you know where your money is going. Get a full understanding of your employer’s 401k plan by asking the right questions. It can make a significant financial difference when it’s time to retire.
Eileen O'Shanassy is a freelance writer and blogger based out of Flagstaff, AZ. She writes on a variety of topics and loves to research and write. She enjoys baking, biking, and kayaking. Check out her Twitter @eileenoshanassy.