401(k) Retirement Savings Plans
A 401(k) retirement savings plan allows you to save and invest money for retirement with tax benefits. Contributions are made to an account in your name for the exclusive benefit of you and your beneficiaries. The value of the account is based on the contributions you make and the investment performance over time.
For further plan information, contact MissionSquare Retirement or your employer's benefits office.
Who Is Eligible for a 401(k) Plan?
401(k) plans are usually offered to for-profit companies but could be available to some public-sector employees in plans that adopted the 401(k) feature prior to 1986. It’s therefore possible that a governmental organization also offers a 401(k) plan to its employees.
Benefits of a 401(k) Plan
A 401(k) plan allows you to participate in your employer’s investment options, which are often a mix of stocks, bonds, and mutual funds. Even better is the benefit of employer-matching of your contributions to accelerate your financial growth.
Other benefits include:
- More Control. You decide how much of your earnings you wish to contribute from each paycheck and can change your investment allocations or contribution any time.
- Tax advantages. You reduce your taxable income for the year when you make contributions to a traditional 401(k).
- Flexibility. You can take your 401(k) with you if you current job. You can roll it over into your next employer’s 401(k) or convert it into an IRA, for example.
- Rollover Options: You can convert your traditional 401(k) into a Roth 401(k) provided you pay taxes on the tax-free contributions you’ve already made. Or, if you employer for another job, you can roll your 401(k) funds into another retirement plan, an IRA or your new employer’s plan without paying taxes, so long as it is done within 60 days of withdrawing the funds from your previous plan.
401(k) Investment Options
A typical plan includes a wide range of options, from more conservative stable value funds to more aggressive bond and stock funds. You may choose to build a diversified portfolio of various funds, select a simple yet diversified target-date or target-risk fund, or rely on specific investment advice through Guided Pathways® Advisory Services.
To review investment options for your plan, log in to your account.
Traditional vs. Roth 401(k)
Traditional 401(k) plans and Roth 401(k) plans differ mainly from a tax standpoint.
With a traditional 401(k), you don’t pay taxes on the money you contribute to the plan; instead, you pay state and federal taxes when you withdraw money from the plan. Roth contributions are made on an after-tax basis; in retirement you pay no income taxes on the funds you withdraw from your Roth account. You can contribute to both a traditional and a Roth 401(k) as long as you don’t exceed the combined contribution limit. While there are tax advantages to each, depending on your current and future expected income, it could be advantageous to contribute to both types of 401(k) to diversify your contributions and retirement income sources.
Participants will need to consider both their current income-tax bracket and their expected income-tax bracket while in retirement. In general, the traditional 401(k) is optimal for people who are in a higher tax bracket now and expect to be making less at time of distribution, or retirement age. Roth deferrals may be most appropriate for participants expecting to be in a higher tax bracket in retirement, allowing them to pay taxes on the contributions now, at a lower tax rate, and receiving tax-free distributions in retirement.
Both traditional 401(k)s and Roth 401(k)s have annual contribution limits set by the IRS from year to year.
Employer Matching of 401(k) Contributions
Your employer may also contribute to your 401(k) account, matching your pre-tax contributions. While some employers elect to match a certain percentage of your contributions, others may choose to match $.50 on every dollar, for example.
When there is employer matching, employee-employer contributions cannot exceed a combined $69,000 per year. If you are over 50, you are eligible to make an additional catch-up contribution of $7,500; with employer contributions, a total of $76,500. Note than any employer matching portion cannot be designated as a Roth deferral.
Plan Comparison
| 401(k) | Roth 401(k) | |
|---|---|---|
| Contributions | Pre-tax dollars; taxable upon withdrawal | After-tax dollars, no tax liability upon withdrawal |
| 2024 Employee contribution limit | $23,000 (combined) | $23,000 (combined) |
| “Age 50 Catch-Up” | $6,500 | Yes |
| Annual Contribution Limits including Employer match (excluding Age 50 Catch-Up) | $69,000 combined | $69,000 combined |
For more information, see contribution limits for the current calendar year
401(k) and Roth 401(k) Withdrawals
You will pay taxes on your traditional 401(k) funds as you withdraw them. You can withdraw without penalty at age 59½. But prior to that, you will pay a 10% early withdrawal penalty plus taxes on the dollars you take out, although some exceptions apply.
Funds withdrawn from a Roth 401(k) are tax-free so long as certain criteria are met: You must have held the account for at least five years and must be age 59½ to begin making tax-free withdrawals (earlier is permitted in case of disability or upon the death of the account holder).
You must begin withdrawing the Required Minimum Distributions (RMDs) of your 401(k) funds (both traditional and Roth accounts) by April 1 of the year after you turn 73*. 401(k) RMDs are calculated according to a formula set by the IRS. Consult your 401(k) plan sponsor to determine your RMD when you decide to begin making withdrawals.
Early Withdrawals
During employment and subject to your employer and IRS rules, you may be able to make early withdrawals; a 401(k) loan option may also be available.
401(k) Hardship Withdrawals
There are exceptions to 401(k) withdrawal rules. Depending on your circumstances you may make hardship withdrawals from your 401(k). According to the IRS, you may be considered to have an “immediate and heavy” financial need if you have any of the following:
- Medical expenses for yourself, your spouse, dependents or beneficiary
- Costs directly related to the purchase of your principal residence (excluding mortgage payments)
- Tuition, related educational fees, and room and board expenses for the next 12 months of postsecondary education for your or your spouse, children, dependents or beneficiary
- Payments necessary to prevent eviction from your principal residence or foreclosure on the mortgage on that residence
- Funeral expenses for you, your spouse, children, dependents, or beneficiary
- Certain expenses to repair damage to your principal residence
As with any early withdrawal, typically you will pay taxes on the funds and a 401(k) early withdrawal penalty.
The Age 55 Rule
Although you typically can withdraw from a 401(k) without penalty after age 59½, there is the “Age 55” rule which allows you to withdraw from your 401(k) without penalty if you job, or even if you’re laid off, terminated, or quit between the ages of 55 and 59½. If you’re a public safety worker, the rule applies at age 50 or later.
Plan strategically for taking withdrawals from your account — both to manage the tax bill and to provide for your future needs. For guidance, visit RealizeRetirement™ or contact your MissionSquare Retirement representative.
401(k) Loans
You may also borrow from your 401(k). Federal law permits you to borrow 50% of your account balance or a maximum of $50,000. A 401(k) loan is tax-free, and you generally have five years to repay it on a fixed schedule as specified in the plan rules. (If you have taken out a 401(k) loan to purchase a primary residence, there is a longer payback period.)
If you take out a 401(k) loan and then employer, you must pay back the balance you still owe, or your loan will be treated as a distribution. You would then pay tax and possibly penalties on that amount.
401(k) Options Upon Leaving a Job
You have a number of choices:
- 401(k) Withdrawals After Age 59½. Assuming you are 59½ years or older when you leave employment you can make withdrawals from your 401(k) without penalty, but you will pay taxes on the funds you withdraw with the exception being Roth assets, if applicable. You can take payments as needed or request scheduled automatic payments and can still maintain control over your investments.
- Leave 401(k) As Is with Old Employer. Some employees may be more comfortable and familiar with the types of investments offered by their old employer and prefer to keep their 401(k) as is.
- Move 401(k) to a New Employer or Roll Over to an IRA. You can roll your 401(k) funds into an IRA or do what’s called a direct rollover into a new employer’s 401(k), assuming plan rules permit it.
Who Gets My 401(k) When I Die?
Your 401(k) would be considered a “survivor benefit” to your designated beneficiary or beneficiaries to receive any remaining assets upon your death. By designating beneficiaries, you can:
- Help ensure your assets are paid per your wishes
- Avoid the potential costs and delays of probate
- Allow non-spouse beneficiaries to receive additional tax benefits
Note: If you’re married, most plans require your spouse be your beneficiary for 100% of your account, unless your spouse formally waives this right.
If you are a MissionSquare plan participant and have any questions, contact us.
* Age 70½ (if you were born before July 1, 1949), age 72 (if you were born after June 30, 1949, and before January 1, 1951), or age 73 (if you were born after December 31, 1950).