Chapter 1-4 Managing Your Account

The gains to your portfolio can be calculated in two ways, through yield and through return.  Yield is the amount of income you accumulate on an investment, expressed as a percentage of your starting investment.  A return is the total amount your investment goes up in value, along with the money you made on the investment.  If you have contributed various amounts to different investments you might want to measure the percent return of your investments instead.  If you have owned an investment over a long stretch of time you might want to measure its annual percent return, which is the percent return divided by the number of years that you have owned the investment.  When you measure your return, you may also want to take annual inflation into consideration.  Measuring your real return will give you an understanding of the buying power your profits will have.  The real return can be figured out by subtracting the inflation rate from your percent return.  For more information on total return and yield of a particular fund you may want to go through the fund’s prospectus, annual or semi-annual reports, or the fund’s website.

Profits on your investments can be found by reviewing your account statements.  You must be provided with an account statement at least once a quarter by your employer.  However, numerous plan providers send you statements every month.  You may also be able to obtain information on your account online.  The rate at which you get account reports is contingent on how frequently your account is appraised.  It may also depend on how often record keepers measure the total value of your 401(k) account.  The assessment of your account also affects the efficiency with which you can reallocate your portfolio.  If you choose to redistribute your assets and your account is only valued every quarter, you may wait until the close of the quarter before you can transfer your investments.

Updates of mutual fund quotations can be found in the newspaper or financial websites.  The mutual funds themselves measure their net asset value (NAV) and the change in price from the prior day and disclose these numbers at the end of every trading day.  Mutual fund research companies then rank the funds depending on how they perform on a monthly, quarterly, and annual basis.  These rankings are reported by newspapers in tables and charts.

You should take into consideration information that is not given by account reports and mutual fund quotations if you want to decide if you want to remain with your current investments or if you want to transfer some or all of your assets into other investments.  You should compare the results of your funds to those of other funds in the same sector.  Benchmarks, which are averages that represent the activity of a specific financial market or market sector, will provide you with an understanding of how your funds are acting against the norm.  If your fund is trailing behind its benchmark for a long stretch of time, you may want to look into replacing it with another fund.  Some standard benchmarks for the major market sectors are the S&P 500 stock index, Russell 2000 Index, Lipper Indexes, and Citigroup Long-Term High Grade Corporate Bond Total Return Index.  Large-cap US stocks and stock funds are measured against the S&P 500 stock index.  Small-cap stocks and funds are measured against the Russell 2000 Index.  Mutual funds are measured against the Lipper Indexes.  And government and corporate bonds and mortgage-backed securities are measured against the Citigroup Long-Term High Grade Corporate Bond Total Return Index.

Not all funds invest in only one sector of the market.  For example, a stock fund may invest in mid-cap and large-cap stocks, while still maintaining a specific amount of its assets in cash.  Also, no two actively managed funds have the same investments in the same sizes.  Companies that concentrate on analyzing how funds are performing use a method to decide the proper benchmarks.  This method is called style analysis, or returns-based style analysis.  It measures a fund’s returns and compares it to the returns of a number of asset classes.

As the performance of the market changes, you may discover that your asset distribution does not guarantee you the balance of return and growth that you desire anymore.  When this happens, you may want to consider modifying your assets and rebalancing your 401(k) portfolio.  Assets accumulate at different rates, which might cause a shift from the asset distribution you have selected.  To offset this, you may want to reallocate into assets whose values have recently grown at a slower pace and may now be ready to grow at a faster rate while the assets that moved at a quicker pace may now be slowing down.  If you do not do this, you may wind up with a portfolio that bears more risk and provides a lesser long-term return than you planned.  You should take into consideration if you need to rebalance your portfolio once a year as part of an annual analysis of your 401(k).  Some funds may reallocate your portfolio regularly, at times as often as each quarter.  These funds are called asset allocation funds.  Even though this may seem favorable, you want to research the transaction fees for this type of fund before choosing it.  In general, transaction fees and expense ratios are likely greater than average.

If your account is accessible online, you may be able to move your assets as many times as you want.  Remember that constant transfers may result in sales charges, exchange fees, exit fees, and back-end loads.  The more times you trade, the more fees you will incur.  Besides the fees that you might owe, moving out of stocks when the market is acting poorly signifies that you are locking in your losses.  Additionally, you do not get a tax deduction on capital losses in a 401(k) like you do in a taxable account.

Your 401(k) portfolio can be rebalanced in various ways to reestablish the balance that you were aiming for.  One rebalancing method is to move money to the asset classes that are trailing to reach the percentage of your total portfolio that it had in your primary allocation.  You can also acquire new investments and focus your contributions on that asset class.  Another method is to sell off a part of your assets in the asset class that is outperforming the others.  You can then reinvest the gains in the asset class that is trailing.  All three of these methods work well, but some people are not as comfortable with the third.  They find it difficult to sell off investments that are acting well so that they can invest money into the investments that are not doing well.  However, if you put money into the trailing asset classes, you’ll be in a position to take advantage if they turn around and start to thrive again.

The asset distribution that you select to aid you in achieving your objectives when you start to invest in a 401(k) may not be the optimal distribution after you’ve been with the plan for 15 or 20 years or as you come closer to retiring.  You should check your portfolio and readjust it if it seems prudent.  Many 401(k) plan holders do not take the time to change their distribution, or may not be sure of what to do so they do not do anything.  That’s why lifecycle funds are being offered more and more as investment choices in 401(k) plans.  Every lifecycle fund is created to have its distribution changed little by little over a span of years, switching its concentration from seeking growth to providing income and securing capital.  More often than not this is achieved by lowering your susceptibility to stocks and building the percentage your lifecycle fund allocates to bonds.  The timeframe of a fund is often part of its name.  For example, if you are considering retiring around 20 years from now, you might put money into Fund 2030 or if your target date is 30 from now, you might select Fund 2040.

Before moving your balances to a lifecycle fund, or target date fund, you’ll want to check out the fund as you would any possible investment, paying attention to its objective, fees, manager, historical performance, and risk levels.  If it meets all of your goals it may be a choice to take into consideration.  You should also remember that lifecycle fund managers may be putting together allocation choices presuming that this is your only investment.  Look over and understand lifecycle funds in regard to your total investment portfolio.  One of the advantages of a lifecycle fund is that it may aid in affording you a more financially stable retirement.  Bear in mind that even though these funds take some of the pressure off your shoulders, they do not guarantee that you’ll achieve your objectives.

There are 401(k) plans that supply asset allocation funds whose goal is to take advantage of changing market circumstances.  They use a technique characterized as a market-timing method to asset allocation.  Before selecting one of these funds, you should consider the advantages and disadvantages of market timing in addition to the possible consequence that constant trading and aggressive management may have on a fund’s expense ratio, and as a result the price of investing in the fund.

When it comes to managing your 401(k), you aren’t alone.  You’ll want to forecast future returns as accurately as possible, and you may need the assistance of outside means to do so.  Fortunately, there are many places you can go for guidance.  One of these places is your employer.  Your employer or 401(k) plan administrator may provide resources to aid you with your financial planning.  A lot of employers offer educational material and seminars about retirement planning and saving.  They also may offer retirement investment guidance online or through a financial specialist.  The majority of these resources are accessible at little or no cost to you.  There are a lot of websites that concentrate in 401(k) guidance.  These websites will likely ask you to provide information about yourself like what investments you own, your rate of contribution, what your financial objectives are, retirement age, and what risk level you find tolerable.

A number of websites may run your information through something called a Monte Carlo simulation to find out what the most likely results for your current distribution are.  With those results, the programs also may advise that you modify your investing plans or objectives.  Online resources can provide a fast analysis of your 401(k) portfolio.  Also take into consideration that some of these resources will charge you for more individualized advice.  Some websites sell their own investments, so you should consider their advice in contrast to the gains they are poised to earn from your investment choices.

You also may want to seek the opinion of an investment professional.  You can get investment consultation from a majority of financial institutions that sell investments including brokerages, banks, mutual funds, and insurance companies.  You can also hire an investment adviser, accountant, financial planner, or other professional to aid you in making your investment choices.  Question any possible financial adviser about his or her background and how they acquired their credentials.  Also ask for clarification on their fees.  FINRA BrokerCheck records the credentials of licensed brokers.  The SEC’s Investment Adviser Public Disclosure Web site lets you look for information about investment adviser firms registered with the SEC or state regulators.  You can also check an adviser’s Form ADV on the SEC’s website or by checking with your state securities regulator.

It is also important to consider rollovers and withdrawals. The probability is high that you’ll change jobs various times throughout the duration of your career.  As a result, an employee may take part in as many different 401(k)s or other retirement savings plans.  401(k) plans are portable.  If you change jobs before retirement, you can generally select among various things to do with your 401(k) plan.  The first is to keep the money in your previous employer’s plan.  A second option is that you can roll over the money to your new employer’s plan, if the plan takes transfers.  Rolling over the money into an IRA (individual retirement account) is a third option.  With these three options, you won’t lose the contributions you have already made, the contributions of your employer if you’re protected, or the earnings that you have amassed in your old 401(k).  Your money will also retain its tax-deferred status until you withdraw it.  But if you roll over your money into a new employer’s plan, you’ll have to wait until you change jobs before you can transfer it again.  The fourth option that you have is to take the cash value of your 401(k) account.  Even though you have this option when you switch jobs, taking an early withdrawal may be subjected to a 10 percent penalty in addition to the taxes you owe.  Maintaining your money in a 401(k) or IRA will let it grow tax deferred.  You are given some time by law, at least 30 days when you change jobs, to think over your options and execute transactions.

Liquidating your account is an easy but expensive alternative.  You can request a check from your plan administrator, but your employer will keep 20 percent of your account balance to bear the cost of the tax that you’ll owe.  Furthermore, the IRS will regard your payout an early distribution, which means that you could owe the 10 percent early withdrawal penalty in addition to federal, state, and local taxes.  This can equal more than 50 percent of your account value.  If your previous employer’s plan has yielded substantial returns with fees that are within reason, you might contemplate keeping your account there.  You will still have the liberty to roll over your account to your new 401(k) or an IRA at any time.  Although your money stays in your former employer’s 401(k) plan, you won’t be allowed to make any more contributions to the account and some employers might block you from modifying your asset distribution and/or instill costly fees if you are not an active employee.  Moreover, you might not be permitted to remain in your old 401(k) account; your employer has the choice of liquidating your account if the balance is less than $1,000, less the 20 percent withholding for the taxes you will owe.

There are benefits of placing all your retirement savings into one 401(k) plan.  Integrating your investments will give you a larger foundation on which new profits can grow and it will make it easier for you to follow the performance of your investments.  You should examine your new employer’s plan before determining whether to roll over your investments.  Verify that the new plan has lots of investment alternatives and contains the investment choices you desire.  Make certain that the fees associated with rolling over your assets into your new employer’s 401(k) are not too costly.  If you are not satisfied with the alternatives offered by your new employer’s 401(k), you can always take into account your other choices.  Keep in mind that even if your new employer welcomes rollovers, you may have to hold off until the next enrollment quarter, or in some cases a full year, to transfer your investments.

There are a few things that you will have to do if you decide to roll over your former employer’s 401(k) into your new employer’s plan.  The first is to make plans for the rollover with your new 401(k) plan administrator.  You may have to choose the assets that you would like before you finish the rollover.  Another thing that you will have to do is to fill out the forms necessary to transfer your money from your former employer’s plan.  The third action is to request your previous administrator to send a check, or electronically transmit your account value directly to the administrator of your new plan.

You may also do an indirect rollover in which you manage the rollover yourself by withdrawing money from your account and putting it in your new employer’s plan.  You may choose an indirect rollover to capitalize on a short-term loan if you are temporarily between jobs.  Choosing an indirect rollover as a short-term loan should be a financial last recourse because you’ll endure early withdrawal penalties unless you pay back the loan within 60 days.

When you indirectly roll over a 401(k), your employer gives you a check for the financial worth of your account, minus 20 percent withholding for the taxes that you will owe.  The IRS requests that your employer take out that 20 percent for fear that you will keep the money instead of rolling it over into another account.  If you fulfill the entire rollover within the time frame, the 20 percent that is kept will be returned to you when you file your tax return for the year.  If you choose to keep the money, the withholding will go for the taxes that you’ll owe on the early withdrawal.

After you are given your check by your employer, you have 60 days to finish the rollover.  If you keep the money longer than the 60 days, it will be considered a full lump-sum distribution.  When you deposit your money into a new account, you must roll over the entire balance of your original 401(k).  You’ll have to put back the 20 percent that is withheld to make up for the entire amount that you are rolling over.  These circumstances make an indirect rollover unattractive on multiple levels.

If you are thinking about rolling over your 401(k), you can open a new IRA with an administrator of your choosing, or you can roll the investments into an existing IRA.  To transfer the money you give your 401(k) plan administrator the account information.  Your 401(k) plan administrator can transfer the investments straight to your IRA custodian either by check or electronically.  This method is known as a direct rollover.  No taxes are due when the money is transferred and any new profits grow tax deferred.

After the money is in your IRA, you can invest it in any of the options obtainable through the administrator that you have selected.  If you continue to earn income you may continue to make contributions to your IRA, up to the annual limit agreed upon by Congress.  In 2009, the government set a limit at $5,000 for contributions plus an extra $1,000 if above the age of 50.  You cannot contribute more than you make in a year.  With a traditional IRA, you cannot contribute after you turn 70 ½ even if you continue to earn income.  In a traditional IRA, you have to take the necessary minimum withdrawals by April 1 of the year after you turn 70 ½.  These withdrawals are taxed at the same rate as your other income.  In comparison, withdrawals are not necessary in Roth IRAs.  You may also have the ability to roll an IRA into a new employer’s retirement savings plan, however not every plan accepts rollovers.  If you are thinking of doing this, you should discuss it with a tax professional to make sure you manage it correctly.

If you meet the requirements you can switch traditional 401(k) investments to a Roth IRA either directly or by rolling over the money to a traditional IRA first and then switching it over to a Roth IRA.  In both circumstances you have to pay the entire amount of the taxes that are due on the amassed contributions and earnings you’re switching.  Your adjusted gross income for 2009 had to be less than $100,000 excluding the total you want to switch to qualify.  In 2010, however, the income limit has been removed so anyone who wants to switch to a Roth IRA is permitted to do so.  You are also allowed to disperse the taxes that are due over two years, 2011 and 2012, instead of making a lump sum payment.  If no withdrawal requirements and tax-free gains are an appealing addition to your retirement objectives you may want to look into converting to a Roth IRA.  Remember that a Roth IRA must be open at least five years and you must be at least 59 ½ before you meet the requirements to make tax-free withdrawals.  It’s a good idea to discuss this with a tax professional before making a choice.

The assets that you have amassed in your 401(k) portfolio can turn into a substantial source of regular income when you retire.  You have various options for taking that income from regular monthly distributions to a lump-sum withdrawal.  It’s important to have a plan in place when you make your decision.  In most circumstances you begin taking the income right after you retire.  However, you may also choose to roll over your assets to an IRA.  If you decide on a traditional IRA, you can defer the necessary withdrawals until you turn 70 ½ if you wish, whereas in a Roth IRA there are no withdrawal requirements.

Your company may be allowed to issue you a regular check depending on a settled annual withdrawal rate from your 401(k) balance.  This can aid you in handling your retirement income.  A stable 401(k) paycheck can also aid you in avoiding withdrawing an excessive amount of money too soon.  This helps to decrease the risk of outlasting your retirement savings.  You can inquire with your employer if this is an option that they, or their 401(k) plan administrator, may provide.

Making a lump-sum withdrawal signifies taking your accrued balance out of your 401(k) account.  You can roll over the money into an IRA (individual retirement account) during a period of 60 days to secure its tax-deferred classification, or you can spend it as you desire by depositing the check or wire transfer into a savings, checking, or investment account.  If you don’t roll over the money you will incur income tax on the entire amount of your pretax contributions, any matching totals your employer contributed, and any gains that have amassed.  You may also incur a 10 percent premature withdrawal penalty if you are less than 59½ years old.  Provided that you roll over your withdrawal, or if your tax bill is lower than the total that was held back, you will get a refund of the total your employer held.  That refund could take more than a year, based on the timing of your withdrawal and when you file your return.

You may want to take a lump-sum withdrawal in company stock from your 401(k) if it has gone up in value when you roll over your account or retire.  You can defer taxes until you sell, maintaining the tax benefits of your retirement account.  When you do decide to sell, any profits that have amassed become long-term capital gains which are taxed at a lower rate.  However, you may want to get professional advice beforehand so you can analyze the possible long-term benefits against the potential disadvantages.

If you enable a direct transfer to your IRA your assets stay tax deferred.  Any eventual gains are also tax deferred and nothing is held to pay in advance for taxes.  You will also be able to select from a wider spectrum of investment alternatives than the choices provided by your 401(k) plan.  This gives you more authority over the total you pay in fees and over which investments you sell off to yield income.  You also have the right to choose if you want to begin withdrawing right away or at some time in the future.  However, you can’t take out a loan from an IRA, and you can’t put off the minimum required allocations if you continue to work past the age of 70½.

When deciding whether to do a rollover, there are a few questions that you should ask when selecting an IRA administrator.  The first is if there is a wide spectrum of investment alternatives.  Is there is a logical process to aid you in overseeing your obligatory distributions?  A third question you should ask is when you start to take income will be allowed to take more than the necessary minimum.  If the administrator is a mutual fund company, you should inquire what their funds’ annual management fees are and if they charge a sales load.  You should ask about their commission system and do not forget to examine the firm’s background.  One place where you can find background information is on FINRA’s BrokerCheck  webpage.

Your employer may offer to keep your 401(k) investments in place after you retire.  This may be an appealing choice if you’re content with the investment options the plan offers.  You will not be able to make any more contributions to your plan, but any earnings your investments make will accrue tax deferred.  Once again, you should take into consideration the expense ratios of the funds in your employer’s plan when making this choice.

You may have a choice in how take income from your 401(k) plan, such as regular withdrawals.  Not all plans are the same so you will have to verify which alternatives are available.  No matter which option you select, the administrator that your employer assigns to manage the plan is in charge of managing your income payments and making sure that the total you take in after you turn 70½ adheres to the required minimum distribution.  This is a characteristic that is attractive to people who would preferably not handle those specific features.

Despite the benefits, there are some disadvantages to remaining with your employer’s 401 (k) plan after retirement.  The first is that the management fees of the plan may be greater than that of an IRA (individual retirement account).  A second disadvantage is that after retirement you may not be able to alter your investment distribution or investment blend.  You may also be obligated to start taking income immediately instead of holding off until you are required to withdraw.

There are many differences between keeping your 401(k) assets in your employer’s plan and rolling them over into an IRA.  Both options remain tax deferred, but if you take a lump-sum withdrawal tax deferral ends.  The first difference is between investment choices.  In a rollover IRA you have a broad selection of investment alternatives in addition to the chance to open various IRAs and invest them in a variety of ways.  With a 401(k), you have to choose between the investments that are provided through your plan.  A second difference between 401(k)s and IRAs is beneficiaries.  In an IRA, anyone can be named a beneficiary, whereas with a 401(k) a spouse must be named a beneficiary and written authorization is required to name another.  Another difference between the two is the distribution calculation.  In a 401(k) the minimum required distribution must be measured for every 401(k) plan separately.  The timing of first withdrawal is another difference.  In an IRA your first withdrawal is whenever you find it appropriate, until you reach age 70½.  In a 401(k) you may be obligated to start withdrawals when you retire.  A fifth difference between keeping your 401(k) assets in your employer’s plan and rolling them over into an IRA is the minimum distribution.  Generally, you might take more than the necessary minimum in an IRA.  In 401(k)s, you may not be allowed to take more than the necessary minimum.  Another difference is loan provisions.  Loans are not allowed in an IRA, but may be permitted through a 401(k).  The final difference between the two is in post-retirement contributions.  Post-retirement contributions are not permitted in 401(k)s, in an IRA they are permitted until you turn 70½ years of age.

In 2009, there was no minimum required distribution.  On December 23, 2008, President Bush signed into law the Worker, Retiree and Employer Recovery Act (H.R. 7327), which allowed a one-year deferment of the required minimum distribution in 2009.  Under this act, Americans 70½ or older were not required to take the mandatory payouts from their 401(k)s, IRAs, and other tax-advantaged retirement plans in 2009.

The age limits associated with 401(k) plans are 59½ and 70½.  The first is generally the age at which you may start to take money from your tax-deferred savings without having to pay a 10 percent early withdrawal penalty.  The second is the age by which you must start taking obligatory withdrawals.  In nearly all cases, you can start withdrawing from your 401(k) account when you retire from your job, on condition that you’ve reached your employer’s retirement age.  Some employers ask that you to begin withdrawing when you retire if your money is in the plan.  You could instead take a lump-sum withdrawal or move the balance into an IRA.

The two important choices you have to make when deciding when to withdraw are the amount and frequency of each withdrawal.  The first question you should ask yourself is should you start withdrawing when you retire or should you hold off until the funds are needed.  The second question that you should ask yourself is will the money be sufficient for your lifetime.  If you have to withdraw from your 401(k) to live well when you retire, there’s no argument to delay.  But if you have other means of income, or if you anticipate to be making money from another job or a post-retirement career, you may want to delay as long as the law permits.  The possibility remains that your account value will increase and it may be reasonable to let your tax-deferred accounts continue to accrue as long as possible.

You can predict your post-retirement cost of living by measuring your spending prior to retiring.  A safe estimate is that you will need 15 to 20 percent less after you retire.  Take into consideration the likelihood of growing medical expenses, insurance costs, local taxes, and other regular bills.  Calculate what you anticipate to receive from Social Security, any determined benefit pension you are eligible for, your spouse’s income if married, and any income you will be making.  You might also calculate dividends and interest from your taxable investment accounts, or the likelihood of taking capital gains.  If that amount is lower than you will need it may be an indication to start withdrawals.  In some cases, your employer may insist you start withdrawing your assets at retirement.  If instant income fits into your plans then there’s no problem.  But, if you would rather hold off, rolling over the investments into an IRA is a smart decision.

One method of collecting income from a 401(k) plan or an IRA is to set up a systematic withdrawal, also referred to as a periodic withdrawal.  You do have to be sure that this is an alternative your plan or IRA provides.  You can select to receive a regular, fixed dollar total on a particular schedule.  You may also select to receive a particular portion of your account total on a particular schedule.  Or, you can choose to receive the entire amount of your account in equivalent distributions over a decided time frame.  You usually choose from a monthly, quarterly, semi-annual, or annual schedule.  Systematic withdrawal plans are often adjustable, which means that you can alter the withdrawal plan by informing the plan administrator or your IRA custodian.  You can stop the payments, regulate the total you receive, or select another withdrawal plan at any time.

Systematic withdrawals make it easier to plan financially because your money comes on schedule.  You do not need to make the choices about what or when to sell, a professional manages those specifics.  One possible disadvantage of systematic withdrawals is that you could spend all your assets during your lifetime.  If your money is distributed at a faster rate than your account is increasing, you will receive money as well as interest and dividends, decreasing the total accessible to accrue additional gains.  When all is said and done your account could end up with no value.

In rare cases you may be provided with the alternative of selling off the assets in your 401(k) plan and procuring a lifetime annuity.  The annuity pays you income for your lifetime or for the joint lifetimes of two people, you and the person you name.  This option, known as annuitization, is similar to the way that a determined benefit pension plan pays its retired workers.  The main benefit is that you cannot outlast your assets, something that many people are afraid of.  The disadvantages are the same as other annuities, such as high management fees, insurance costs, and lack of adjustability.  In nearly all instances after you have annuitized you may not change your mind, or only after paying a considerable fee.

If you annuitize, you may have the ability to select between a fixed annuity and a variable annuity.  With a variable annuity, your income is based on the investment performance of the funds you choose from among those provided by the annuity company.  A fixed annuity offers the security of consistent income but leaves you vulnerable to inflation risk.  A variable annuity offers the potential of bigger payments in the future, but bears the risk that your payments could become smaller.  Another annuity option would be to rollover your 401(k) and purchase an individual retirement annuity.  This is a good alternative for people who want to ensure they have income for life.  However, you need to take into consideration high fees, lack of adjustability for making unplanned withdrawals, and the unreliable financial circumstances of some of the insurance companies that insure them.

Your employer may offer plenty of notice in advance about the specifics of setting up retirement income, but it is your responsibility to satisfy the deadlines.  It is important to plan beforehand and to seek professional guidance.  Collaborating with a qualified retirement planner can aid you in evading some of the traps of making unsuitable withdrawal determinations.  It may also make you more certain about the complete set of decisions that are part of retiring and withdrawing from your 401(k) plan.

Instead of presuming that you will, or should, withdraw your 401(k) assets in their entirety before you die, an adviser should take in to consideration your retirement savings in the situation of your estate plan.  The greater your account balance is and the more additional investments you have the more substantial an inclusive outline fits.  You must give your adviser a copy of your 401(k) plan report.  Its details will assist in the determining the choices you can make and outlining what will occur to your assets at your death.

When you are selecting an adviser make sure to inquire about how he or she is paid, and how much you should anticipate paying every year.  Some advisers require a flat fee based on the investments in your account.  Some require a commission for every execution.  Make sure you read and comprehend the adviser’s fee arrangement prior to hiring him or her.  Do not forget to inquire about the adviser’s qualifications.  If an adviser has a credential, inquire about what it signifies and what is needed to merit it.

In regards to borrowing from your 401(k), you actually may be capable of utilizing your 401(k) plan assets during a financial emergency.  While obtaining a loan or a hardship withdrawal may aid you in resolving an urgent obligation, the effects may lower your long-term security.  If you are in immediate need of money you may be inclined to take a loan from your 401(k) instead of a bank or other lender.  Keep in mind that not all 401(k) plans grant loans, but a number of them do.  With most plans you may pay back your loan through payroll deductions, so it is unlikely you will default provided that you stay employed.  When you take a loan from your 401(k) you sign a loan agreement that explains the principal, term, interest rate, fees, and other conditions that may be applicable.  You may have to wait for the loan to be validated, although in nearly all circumstances you will be eligible because you are taking a loan on your own money.  Federal law restricts the total you can borrow to the lower of $50,000 or half of the total you have invested in the plan.  In some cases there is a loan floor, or minimum amount you have to borrow.  The law also states that you pay market interest rates.  Market interest rates have to be equivalent to what an established lender would require on a comparable personal loan.  The duration of a 401(k) loan is usually five years.  The most common exception occurs when you are utilizing the money to purchase a primary residence.  In this case a number of plans permit you to take out a loan for 25 years.

When you take out a loan from your 401(k) the money is typically taken out of your account balance.  In most plans, the money is taken out evenly from each of the various investments.  In other 401(k) plans you may be allowed to specify which investments you would like to draw out of.  The benefit of being allowed to select is that you can keep the investments giving you the strongest performance intact.  Because there is no way to anticipate market performance, you might take money from stock funds that are doing poorly just to discover that those funds were on the verge of recapturing their strength.  Consequently, having endured losses, you would fail to take advantage of the growth.  The loan money you pay back is reinvested, but by what means and when varies from plan to plan.  Numerous plans reinvest after your payment is finished, However, other plans develop a loan fund to accept your payments along with others who take out loans on their 401(k)s.  In that circumstance, the money and interest may go back into your own account only when the entire loan has been paid back.

There are various benefits and disadvantages when borrowing from your 401(k) account.  One of the benefits is that you typically do not need to state why you require the money or how you plan on spending it.  A second benefit is that you may obtain a lower interest rate than you would have received at a bank or other lender, particularly if you have a low credit score.  Another benefit of borrowing from your 401(k) is that the interest you pay back goes into your account.  A fourth benefit is that because you are taking out a loan instead of withdrawing money, there is no income tax or early withdrawal penalty.  One of the disadvantages of borrowing from your 401(k) is that the money that you withdraw will not grow while it is lent out.  A second disadvantage is that the payments are made with after-tax dollars and they will be taxed again when you finally withdraw them from your account.  Another disadvantage in borrowing from your 401(k) account is that the charges you pay to set up the loan may be more than on a customary loan.  A fourth disadvantage is that the interest is never decreased, even if you utilize the money to purchase or remodel your home.

If you leave your job, you will most likely need to pay back the whole balance within 90 days of your leaving.  If you do not pay back the loan you are in default, and what is left of the loan balance is treated as a withdrawal.  Income taxes are due on the entire amount.  If you are 59½ years of age or younger you may be obligated to pay the 10 percent early withdrawal penalty.  If this should occur you could realize that your retirement savings have been depleted considerably.

A hardship withdrawal is a withdrawal from your 401(k) account to aid you in meeting the expenses of a serious financial emergency.  If your plan grants these withdrawals, and not every plan does, you should most likely regard it as your last alternative.  If you do apply, your plan will more than likely require you to do two things.  The first is to verify that your circumstance meets the requirements of a hardship, typically by supplying detailed bills or other corroborating records.  The second thing that your 401(k) plan may need is for you to establish that you cannot produce the money by any other means.

If your application is accepted you can typically withdraw the money you put in, but not your employer’s contributions or any profits that have accrued in the account.  The only exception is if you started contributing before 1989.  Consequently, you might also be allowed to withdraw gains attributed to your account prior to December 31, 1988.  Lastly, your plan administrator may make inquiries after the withdrawal to make sure that you utilized the money as you designated you would in your application.  You will also need to wait six months prior to being able to contribute to your plan again.

Whenever you withdraw pretax money from your 401(k), you have to pay income tax.  A hardship withdrawal is not an exemption from this rule.  If you are 59½ years of age or younger you may also have to pay the 10 percent early withdrawal penalty, unless you are utilizing the money to pay uncovered medical costs that surpass 7.5 percent of your adjusted gross income.  You may be able to put off paying any tax owed by timing your withdrawal to occur at the start of the new tax year instead of at the end of the previous tax year.  For example, if you withdraw money in January instead of December you have an extra year to pay the tax.  You can help yourself by making plans for your taxes.

If you are in debt or if you get divorced, your lenders or your former spouse may want a share of your 401(k) plan assets.  Their rights, and yours, are spelled out in the law.  If you are in debt, your lenders may attempt to collect what you owe them.  However, whether they will be able to coerce you to sell your 401(k) assets to satisfy your debts is contingent on who they are and the legal paths they use.  Typically, your 401(k) is protected from commercial and professional claims, like legal fees or car repair bills, if you are sued in federal or state court.  This is due to the federal ERISA law, which oversees all 401(k) plans and overrules state laws regulating retirement plans.  Generally, you cannot be coerced to utilize your 401(k) money to pay state and local income, property, or other taxes.  However, if you have to pay child support, alimony, or federal income taxes a court may rule that you withdraw money from your 401(k) to pay those debts.  You may wish to find legal counsel to ensure which will be appropriate as state and federal laws vary.

In the case of divorce your former spouse may have a right to a part of the assets in your 401(k) account, or to a portion of the original account.  This is based on where you live as the laws regulating marital assets vary from state to state.  In community property states, you and your former spouse typically split up the value of your accounts evenly.  The nine community property states that obligate even division of marital assets are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.  In other states, assets are generally split up fairly instead of evenly.  This signifies that the splitting up of your assets might not be a 50/50 split.  In a number of instances, the partner who has the greater income will be given a bigger portion.

For your former spouse to get a portion of your 401(k), his or her attorney will request that the court dispense a QDRO (Qualified Domestic Relations Order).  It notifies your plan administrator to produce two subaccounts, one that you manage and the other that your former spouse manages.  This makes you both participants in the 401(k).  Even though your spouse cannot make further contributions, he or she may be allowed to alter the way the investments are distributed.  Your plan administrator has 18 months to decide on the efficacy of the QDRO.  Your spouse’s attorney may request that you not be able to take out a loan from your plan, withdraw the assets, or roll them over into an IRA prior to the finalization of that decision.  Your former spouse may decide whether to take the money in cash, roll it over into an IRA, or keep the assets in the 401(k) plan after the splitting up of the account is complete.  If there’s a cash agreement income taxes will be owed on the amount that’s drawn out of the account.  If your spouse receives the money he or she is accountable for paying the taxes owed.  If the money goes to your children or other dependents you will have to pay the tax.

Most 401(k) plans perform justly, effectively, and in a way that treats everyone who is affected fairly; however, complications can occur.  The Department of Labor lists indications that might warn you to possible problems with your plan.  One of these indications is account statements that are regularly late or unreliable.  A second indication is the late or questionable investment of your contributed funds.  Other indications of possible problems are an incorrectly stated account balance and losses that cannot be accounted for by market performance.  A fifth indication is if there are investments that you did not approve.  Late or inconsistent payment of profits to previous employees is still another indication, along with unusual executions that show up on your account statement.  An eighth indication is numerous and unaccounted for changes in plan providers.  If you suspect that there is a problem with your 401(k) plan speak to your plan administrator or employer immediately.  They may agree that you have a reasonable suspicion or they may be able to clarify any confusion.

If you are still unsatisfied there are plenty of places to go for help.  The Labor Department’s Employee Benefits Security Administration (EBSA) is the agency entrusted with carrying out the rules regulating the behavior of plan managers, investment of plan money, recording and revealing of plan data, enforcing of the trustee terms of the law, and workers’ benefit rights.  When you call EBSA to make an accusation make sure you have the required documents (such as your summary plan description and up-to-date plan statements) readily available.  The regional office will ask you a list of questions to aid in deciding the validity of your accusation.  If it is just, the EBSA will speak to your employer and start an investigation into the administration of your plan.  EBSA will not reveal your name to your employer.  If your employer finds out that you have made an accusation your job will not be affected.  Anti-retaliation terms keep you safe from abuse or discrimination and guarantees that you cannot be fired.  If a problem includes a brokerage firm acting as the 401(k) fund administrator, or brokers who gave advice and managed executions, you have the option of filing a complaint with FINRA.  You can file a complaint with FINRA online through their Investor Complaint Center.  Moreover, you can find out online if a brokerage firm or its representatives are FINRA members through FINRA BrokerCheck.

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