Common misconceptions about 401(K) Plans
In my efforts to provide you with information that you can use, I wanted to feature an article from a recent Beyond the Number$ newsletter, from Bowers Private Wealth Management that focused upon a few common misconceptions when dealing with 401(K) Plans.
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(1) If I leave my job, my entire 401(K) account is mine to keep.
- This may or may not be true. Be sure to check your 401(K)'s summary plan description about your plan's vesting schedule. But, do keep in mind that your own contributions to the plan (pre-tax and Roth contributions) are always yours to keep.
(2) Borrowing from my 401(K) plan is a bad idea because I pay income tax twice on the amount that I borrow.
- When you repay a 401(K) plan loan, you're repaying the loan with after-tax dollars. However this would be true of any type of loan.
- While it's also true that the amount you borrow will be taxed when distributed from the plan (special rules apply to loans from Roth accounts), those amounts would be taxed regardless of whether you borrowed money from the plan or not.
- Always keep in mind that borrowing from your 401(K) plan reduces your account balance, which may slow the growth of your retirement nest egg.
(3) When I make only Roth contributions to my 401(K) plan, my employer's matching contributions are also Roth contributions.
- Employer 401(K) matching contributions are always pretax regardless of what they are matching. Any matching contributions, and associated earnings, will always be subject to taxes when you receive them from the plan in the years to come.
- Do keep in mind though, that you can convert the matching contributions to Roth if allowed by your plan.
If you have any questions, or need help with your own individual wealth management, please contact me and I'll be glad to speak with you. In the next couple of days, I will post a few additional misconceptions regarding 401(K) Plans.