401k plan available at work.. Should I take advantage of it, and other questions... - Tilted Forum Project Discussion Community

Jimellow · 04-13-2005, 08:54 AM

Heya everyone.

The job I am currently with (just got hired) offers a 401k plan for their employees.

I am a part time worker (and college student), and will be getting about 20 hours a week, at $8.50 an hour to start.

I received a mailer today regarding the 401k plan my company offers. It is offered through the Teamsters and CitiStreet.

This is the first job I've had where I have been able to put money aside in a 401k plan, and I'd appreciate some information about it, as well as advice on whether I should take advantage of it or not.

Specifically, the CitiStreet 401k plan is called "The Plan" for those that might be familiar.

The portion of the brochure that stood out and might be especially relevant here is:

Quote:

Every pre-tax dollar you invest in the Plan reduces your current taxable income by a dollar. The more you contribute (up to the maximum the Plan allows), the lower your current tax bill.

Let's say you ear $12,000 a year and you decide to contribute $10 a week (4% of your pay) to the Plan. After 12 months, you've contributed $480. That $480 is deducted from your salary and Uncle Sam taxes you on $11,520 instead of $12,000, lowering your tax bill. Compared with saving the same amount in a regular taxable savings account, you actually end up with more take home pay.

Lastly, here is a note regarding how much can be invested in the plan:

Quote:

The ability to defer up to 25% of your eligible pay and 100% of your option week pay if applicable

Can someone please explain this to me? I kind of "get it," but I don't understand it well enough.

Also, right now I am working part time. It seems like a nice company with a lot of opportunities for an employee to "branch out" into an area that interests them, and thus the option of making this a career is certainly a possibility.

However, what if I would work for this company for 5 years, putting a percentage aside every month, but then quit?

Would I be able to get my money I had invested back? If yes, what kind of penalties would I have to pay, and what other stipulations would likely exist? Also, if I am unable to get the money back, then is a 401k plan a risk worth taking for me at this point in my life?

Also, if you have any other comments, suggestions, or recommendations regarding a 401k plan and me I would greatly appreciate it.

It seems like a great idea, but any time money is involved I like to make sure I am making an informed and researched decision, so that it doesn't come back to bite me a few years down the road.

I'd really like to hear what you recommend I do, and also why. The why is important, because this is new to me, and I am reluctant to put random percentages of my money aside, unless I am sure it's a good idea, and understand how 401k plans work.

I was raised by parents that instructed the value of informed investing and putting money aside, not living paycheck to paycheck, and this seems to be one of those opportunities. I just want to make sure I make the right decision now, so that it doesn't turn around on me later.

Thanks!

Cynthetiq · 04-13-2005, 09:15 AM

okay... here's quick and dirty info:

401(k) is for retirement, you cannot "get it back" without heavy penalties. Once you leave the company you may be asked to roll it over into an IRA. You are contributing PRETAX dollars instead of AFTER TAX dollars. So if you were to us an IRA instead of an 401(k) you'll be using AFTER TAX dollars, and then when you have to pay income tax when cash out the IRA you'll again pay tax one more time. Double taxing.

You don't mention anything about them doing any matching. If the are matching a percentage of your contribution then you should if you can take that money that is sitting on the table.

Normally you get 100% of the money once you are vested (5 years at most companies) and it goes in 20% increments for each year of service so if you quit at year 4, you get 80% of their match.

Jimellow · 04-13-2005, 09:53 AM

Thanks for the reply.

I was talking with my dad, and it seems at the point I am in my life, a 401k may not be the best idea for me..

Instead, I am going to look into starting a Roth IRA, where you pay the taxes up front, and then throw money into that when I have a few extra bucks.

The 401k offered sounds nice, but honestly, when compared to a IRA (namely, a Roth IRA), I like the freedom it provides, both in funds available as well as not being tied to a single employer based on a 401k plan.

From what I understand, Roth IRA's are pre-tax, and thus nice for when I retire and won't necessarily have a steady income coming to me, and would "value" the tax-free money more.

I consider my current job to be a possible career, but nothing is set in stone yet, as I am not even done college yet.

I really would like to start up a Roth IRA though, so that I can have it there to contribute money to when I have a few extra bucks, and I think I will opt to work towards that instead of a company 401k plan at this point.

Thanks for the reply and information. After talking with my dad it seems that a Roth IRA sesms like a better idea given my situation, primarily because the pretax seems to help reduce the taxes paid later, when the money is withdrawn.

I'm really excited to invest a little money into a long term retirement-like plan, I just don't have lots of extra spending money at this point in my life, but I'd still like to start up a Roth IRA as soon as I can, just so it's there for me when I do have a few bucks.

I think I've repeated that line about three times so far, and that is an indicator that I am rambling.

Thanks again for the reply and information.

Cynthetiq · 04-13-2005, 10:37 AM

The only part that makes the contributions worthwhile is if your company will give you free money...

Quote:

http://www.fool.com/news/commentary/...tary030416.htm

If you're confused about which type of retirement account to choose, here's the quick and easy (and probably smartest) strategy: Put your money in a Roth IRA. Compared to a employer-sponsored retirement account -- such as a 401(k) or 403(b) -- or a traditional IRA, the Roth is by far more flexible and likely will lead to more money in retirement.

The only exception: If your employer matches contributions to your work-sponsored plan, then it's probably best to take advantage of that free money. But contribute only up to the point that contributions are matched; after that, send your retirement money to a Roth.

and don't forget that when you quit said company, you can also roll your 401(k) into a Roth IRA.

NoSoup · 04-14-2005, 11:36 AM

Echoing what Cynthetiq said - before you dismiss the possibility of the 401(k) make sure that your employer will not match any contributions. If they do, it's probably much to your benefit that you max out whatever they will contribute.

For instance, one company that I had previously worked for would match 100% of the contributions I put in up to 9%, which is extraordinarily rare and an incrediblely great deal. Basically, for every dollar I put into my retirement fund, they would put in an extra dollar for me, up to 9% of my annual income. The company I currently work for matches 50% of my contributions up to 6% of my annual income - so for every dollar I put in, they give me an additional $.50.

A couple of things to consider...

If you were to quit, all the money you put in is still yours - it cannot be taken away (with the exception of potentially losing value in stocks, or something similar) If you have become partially or fully vested, the amount vested is yours as well. When you are fully vested, it basically means that you have been at the company long enough to keep all the money that have matched. They are required to match you as soon as you start contributing, but if you leave before you are vested, you may not be able to get to keep all, if any, of it. Vesting typically takes place in one of two ways - Cliff or Tiered vesting. Here in WI, I believe that there there is a maximum of three years for cliff vesting and a max of five years for tiered vesting. In essense, if I was with a company that cliff vested after three years and quit 1 day before my three year anniversary, I would not get to keep any of the money they put in the retirement plan for me, although what I put in would still be mine and have to be transferred to another retirement vehicle to avoid paying taxes on it. If I quit the day after my three year anniversary, 100% of the money that they put in would be mine as well as the funds that I had contributed. Tiered vesting is similar - if it is 20% a year, on my 2nd year I would get 20% of the money they contributed and keep all of my own, my third year I would keep 40%, ect.

It sounds like you are working for a larger company, so I would bet that they do offer the ability to match contributions - you can likely check with you Human Resources department for more information regarding how your company's vesting policy works, as well as the amount they match up to what percent of your total income.

Remember, one way to look at it is an immediate return on your money - if you are in college and think that you'll stay there until you are at least 50% vested or whatever, it basically means that you get an 50% profit immediately, and all earnings in the future are based on that 150% that you put in.

Hope this wasn't to confusing and helped a bit

gar1976 · 04-14-2005, 07:30 PM

Quote:

Originally Posted by Cynthetiq

okay... here's quick and dirty info:

401(k) is for retirement, you cannot "get it back" without heavy penalties. Once you leave the company you may be asked to roll it over into an IRA. You are contributing PRETAX dollars instead of AFTER TAX dollars. So if you were to us an IRA instead of an 401(k) you'll be using AFTER TAX dollars, and then when you have to pay income tax when cash out the IRA you'll again pay tax one more time. Double taxing.

Rolling over from a 401(k) to a regular IRA is a tax-free event, better luck next time.

Regular IRA accounts also use pretax dollars. ROTH IRA accounts are post-tax contributions.

gar1976 · 04-14-2005, 07:35 PM

Check the matching on the 401 plan - if it's through a union (you did mention "Teamsters") those can be fairly lucrative.

Having several grand in a Roth IRA by the time you're 20 can be huge - it will grow tax free over 40-50 years, and at 6-8%, do the math!

If your AGI is under $50k, you'll also get a tax credit for contributions to a 401k, Roth, or regular IRA, the credit amount is a tiered % based on your AGI, and can be up to 50% of your contributions if your AGI is under $30k.

Talk to your payroll department, or if you have a friend who is a tax CPA, hit them up for some time.

Cynthetiq · 04-15-2005, 06:58 AM

Quote:

Originally Posted by gar1976

Rolling over from a 401(k) to a regular IRA is a tax-free event, better luck next time.

Regular IRA accounts also use pretax dollars. ROTH IRA accounts are post-tax contributions.

I didn't get penalized, I followed the procedures outlined. I do know plenty of people that cashed their checks instead of depositing it because they wanted a "toy".

how is a regular IRA also pretax dollars since you're paying it from after your paycheck is cashed? Is that done on the back end during income tax filing?

NoSoup · 04-15-2005, 07:30 AM

Quote:

Originally Posted by Cynthetiq

I didn't get penalized, I followed the procedures outlined. I do know plenty of people that cashed their checks instead of depositing it because they wanted a "toy".

how is a regular IRA also pretax dollars since you're paying it from after your paycheck is cashed? Is that done on the back end during income tax filing?

Yep -

Unless, of course, you are rolling over pre-tax dollars from another retirement vehicle, such as a 401(k) or the like, then it is done up front.

As for this next part, it's been a couple of years, so Gar1976 probably should verify, but....

I think you are able to deduct either all or part of your contribution, based on your income, filing status, ect. However, if you contribute more than you can deduct, you can leave that money in there as a "nondeductable contribution." If you do that, you aren't taxed on that money when you later withdraw it, as taxes have already been paid.

gar1976 · 04-16-2005, 11:48 AM

Quote:

Originally Posted by NoSoup

Yep -

Unless, of course, you are rolling over pre-tax dollars from another retirement vehicle, such as a 401(k) or the like, then it is done up front.

As for this next part, it's been a couple of years, so Gar1976 probably should verify, but....

I think you are able to deduct either all or part of your contribution, based on your income, filing status, ect. However, if you contribute more than you can deduct, you can leave that money in there as a "nondeductable contribution." If you do that, you aren't taxed on that money when you later withdraw it, as taxes have already been paid.

A regular IRA is considered "pretax" because you get to take a deduction on the front page of your 1040 in coming to AGI, so the contributions are not taxed for either federal or state.

And chipping in nondeductible contributions to a regular IRA is a waste of time, for various reasons. Don't do it.

Cynthetiq · 04-17-2005, 06:19 AM

so it's not wise to contribute if you had the income, max to 401(k) (to get contirbution matching), and max contibution allowed (even though not deductible)? (i'm not currently doing that at all, just contribution to my 401(k)

even though I don't get the benefit of the tax advantages, how do I "lock it in" for retirement besides self discipline?

NoSoup · 04-18-2005, 06:49 AM

Quote:

Originally Posted by Cynthetiq

so it's not wise to contribute if you had the income, max to 401(k) (to get contirbution matching), and max contibution allowed (even though not deductible)? (i'm not currently doing that at all, just contribution to my 401(k)

even though I don't get the benefit of the tax advantages, how do I "lock it in" for retirement besides self discipline?

I would contribute a minimum of the largest amount they would match - if you would like to contribute more, you certainly can, however - I wouldn't recommend contributing more than you are allowed to deduct, as it offers no real benefit over other retirement vehicles, and several disadvantages.

To encourage you to "lock it in" until retirement, the government applies hefty (read: over 30%) penalties if you withdraw from a retirement plan without a qualifying reason. A qualifying reason will allow you to withdraw some or all of your funds out for specific reasons without penalty. Medical Expenses, Downpayment for a home, ect are a couple of qualifying reasons, but from my understanding there are a ton of strings attached.

Matadon · 04-25-2005, 06:49 PM

Quote:

Originally Posted by gar1976

Rolling over from a 401(k) to a regular IRA is a tax-free event, better luck next time.

Regular IRA accounts also use pretax dollars. ROTH IRA accounts are post-tax contributions.

You have K.O.-ed The Correct.

It's called a Rollover IRA, and is tax-exempt. You roll your 401(k) into the Rollover IRA when you leave the company, and then at a later date can migrate this cash into something like a Roth IRA. This is what I'm doing next year with the money from my 401(k), because I'm spending a few years as an underemployed student, and will pay next to nothing in taxes when I convert my Rollover into a Roth.

At your age, either is fine, and it's great that you are considering a retirement account. I was dumb when I was 18 and working full-time for a company that matched 25% on the 401(k) offered to its employees; I could have thrown a whopping $100 a month in my 401(k), gotten knocked down a tax bracket, and had an extra $25 a month in my retirement account, all for free. Don't be dumb like I was.

04-13-2005, 09:15 AM	#2 (permalink)
Cynthetiq Tilted Cat Head Administrator Location: Manhattan, NY	okay... here's quick and dirty info: 401(k) is for retirement, you cannot "get it back" without heavy penalties. Once you leave the company you may be asked to roll it over into an IRA. You are contributing PRETAX dollars instead of AFTER TAX dollars. So if you were to us an IRA instead of an 401(k) you'll be using AFTER TAX dollars, and then when you have to pay income tax when cash out the IRA you'll again pay tax one more time. Double taxing. You don't mention anything about them doing any matching. If the are matching a percentage of your contribution then you should if you can take that money that is sitting on the table. Normally you get 100% of the money once you are vested (5 years at most companies) and it goes in 20% increments for each year of service so if you quit at year 4, you get 80% of their match. __________________ I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not. What's the best nation in the world? DO-NATION!

04-13-2005, 09:53 AM	#3 (permalink)
Jimellow Junkie	Thanks for the reply. I was talking with my dad, and it seems at the point I am in my life, a 401k may not be the best idea for me.. Instead, I am going to look into starting a Roth IRA, where you pay the taxes up front, and then throw money into that when I have a few extra bucks. The 401k offered sounds nice, but honestly, when compared to a IRA (namely, a Roth IRA), I like the freedom it provides, both in funds available as well as not being tied to a single employer based on a 401k plan. From what I understand, Roth IRA's are pre-tax, and thus nice for when I retire and won't necessarily have a steady income coming to me, and would "value" the tax-free money more. I consider my current job to be a possible career, but nothing is set in stone yet, as I am not even done college yet. I really would like to start up a Roth IRA though, so that I can have it there to contribute money to when I have a few extra bucks, and I think I will opt to work towards that instead of a company 401k plan at this point. Thanks for the reply and information. After talking with my dad it seems that a Roth IRA sesms like a better idea given my situation, primarily because the pretax seems to help reduce the taxes paid later, when the money is withdrawn. I'm really excited to invest a little money into a long term retirement-like plan, I just don't have lots of extra spending money at this point in my life, but I'd still like to start up a Roth IRA as soon as I can, just so it's there for me when I do have a few bucks. I think I've repeated that line about three times so far, and that is an indicator that I am rambling. Thanks again for the reply and information. __________________ Desperation is no excuse for lowering one's standards.

04-14-2005, 11:36 AM	#5 (permalink)
NoSoup Non-Rookie Location: Green Bay, WI	Echoing what Cynthetiq said - before you dismiss the possibility of the 401(k) make sure that your employer will not match any contributions. If they do, it's probably much to your benefit that you max out whatever they will contribute. For instance, one company that I had previously worked for would match 100% of the contributions I put in up to 9%, which is extraordinarily rare and an incrediblely great deal. Basically, for every dollar I put into my retirement fund, they would put in an extra dollar for me, up to 9% of my annual income. The company I currently work for matches 50% of my contributions up to 6% of my annual income - so for every dollar I put in, they give me an additional $.50. A couple of things to consider... If you were to quit, all the money you put in is still yours - it cannot be taken away (with the exception of potentially losing value in stocks, or something similar) If you have become partially or fully vested, the amount vested is yours as well. When you are fully vested, it basically means that you have been at the company long enough to keep all the money that have matched. They are required to match you as soon as you start contributing, but if you leave before you are vested, you may not be able to get to keep all, if any, of it. Vesting typically takes place in one of two ways - Cliff or Tiered vesting. Here in WI, I believe that there there is a maximum of three years for cliff vesting and a max of five years for tiered vesting. In essense, if I was with a company that cliff vested after three years and quit 1 day before my three year anniversary, I would not get to keep any of the money they put in the retirement plan for me, although what I put in would still be mine and have to be transferred to another retirement vehicle to avoid paying taxes on it. If I quit the day after my three year anniversary, 100% of the money that they put in would be mine as well as the funds that I had contributed. Tiered vesting is similar - if it is 20% a year, on my 2nd year I would get 20% of the money they contributed and keep all of my own, my third year I would keep 40%, ect. It sounds like you are working for a larger company, so I would bet that they do offer the ability to match contributions - you can likely check with you Human Resources department for more information regarding how your company's vesting policy works, as well as the amount they match up to what percent of your total income. Remember, one way to look at it is an immediate return on your money - if you are in college and think that you'll stay there until you are at least 50% vested or whatever, it basically means that you get an 50% profit immediately, and all earnings in the future are based on that 150% that you put in. Hope this wasn't to confusing and helped a bit __________________ I have an aura of reliability and good judgement. Just in case you were wondering...

04-14-2005, 07:35 PM	#7 (permalink)
gar1976 Custom User Title Location: Lurking. Under the desk.	Check the matching on the 401 plan - if it's through a union (you did mention "Teamsters") those can be fairly lucrative. Having several grand in a Roth IRA by the time you're 20 can be huge - it will grow tax free over 40-50 years, and at 6-8%, do the math! If your AGI is under $50k, you'll also get a tax credit for contributions to a 401k, Roth, or regular IRA, the credit amount is a tiered % based on your AGI, and can be up to 50% of your contributions if your AGI is under $30k. Talk to your payroll department, or if you have a friend who is a tax CPA, hit them up for some time. __________________ Blistex, in regards to crappy games - They made pong look like a story driven RPG with a dynamic campaign.

04-17-2005, 06:19 AM	#11 (permalink)
Cynthetiq Tilted Cat Head Administrator Location: Manhattan, NY	so it's not wise to contribute if you had the income, max to 401(k) (to get contirbution matching), and max contibution allowed (even though not deductible)? (i'm not currently doing that at all, just contribution to my 401(k) even though I don't get the benefit of the tax advantages, how do I "lock it in" for retirement besides self discipline? __________________ I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not. What's the best nation in the world? DO-NATION!