Author Topic: 22 and about to have my first 401k - Help?  (Read 3773 times)

Future Lazy

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22 and about to have my first 401k - Help?
« on: November 19, 2014, 12:13:13 PM »
Hi Mustachians,

I was hired on to my company in January of 2014, and was told at that time that I wouldn't be eligible for a 401k until Jan 2015 - which really rubbed me the wrong way at the time, since if I had been hired in December, I would have qualified... Well, anyways. On top of that, I haven't been able to get my HR person to provide me any information about the 401k program where I work.

What I DO know about it:

There is matching, but it's discretionary and the percentage changes from year to year; it comes down from the board of directors in January. For example, I know that in 2010, it was 7%, but at any time the company doesn't make enough extra profit, that could be 0% matching.

But that's all I know, and I won't know any of the other details until January when they enroll me.


Some questions I have:

Does anyone know of a good general primer about 401ks, a how-to article or something like it?

My HR department has been stubborn/evasive about providing information about the 401k program on the pretense that I am not currently enrolled - What information should I expect them to provide me once I am enrolled?

What questions should I be asking my HR department about their 401k plan?

How exactly does matching work?

Can I make 2014 tax deductible contributions in the beginning of 2015 to try to qualify for the saver's tax credit for 2014?

What is the saver's tax credit all about anyways? I think I qualify for it, since I make less than a certain amount...?

If I am planning on retiring 'extremely' early - as in, in my 30's some time - should I be contributing heavily to a retirement account I have to wait to withdraw from until I am 60+, or should I continue to put my current income towards taxable investments/goal of homeownership?


I'm kind of in the dark about it right now, but am looking forward to speaking with my company's financial advisor directly in January. I just like to know what to expect, and have information from a lot of different sources.

Thanks to anyone who answers!

waltworks

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Re: 22 and about to have my first 401k - Help?
« Reply #1 on: November 19, 2014, 12:23:00 PM »
Most of your questions are answered in other threads, but:
-Find out *what* you can invest in through your 401k. In many cases the options are pretty lousy (ie high fees) but the tax savings and potential company match will make it worthwhile anyway. Worst case scenario when you leave the company you can roll everything to Vanguard.
-You can get your 401k money before you are 59.5 with a little planning, look for threads about "roth conversion" or "sepp".
-You can contribute $18k for 2015. Your employer can choose to contribute regardless of what you do, contribute matching funds up to a certain % of your salary, or contribute nothing. For most people even without a match the 401k is worthwhile, though it will depend on your tax situation and retirement plans.
-I'm not sure if you can make contributions for 2014 in 2015, but you have until tax time to contribute to a 2014 IRA (independent of your employer) if you want to get some tax advantaged investing in.

-W

Pooperman

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Re: 22 and about to have my first 401k - Help?
« Reply #2 on: November 19, 2014, 12:25:22 PM »
1) Check out the ROTH pipeline over at madfientist.com . You can pull the money out much sooner tax free* (read the website to understand fully).
2) Contributions are only valid the year you make them. 2015 contributions count for 2015, not 2014. You can use your IRA space (5,500) potentially to get the saver's credit (depends on how much you make and other things of course).
3) Go with the lowest fee index funds the 401k plan offers. Next year you have 18,000 worth of room to reduce your AGI with.
4) You should expect to get information on matching, which funds are available, and whether or not ROTH contributions are allowed in the plan you have.
5) Matching works differently in different places. Some places give you a flat % no matter how much you put in. Some places require you to put in and match (hence the term). My current is 1-to-1 matching up to 3%. If i put in 1%, they put in 1%. If I put in 15%, they put in 3% since that is the max they will put in. Other places will match fractionally (i.e. 3% when you put 4%).

slugline

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Re: 22 and about to have my first 401k - Help?
« Reply #3 on: November 19, 2014, 12:49:01 PM »
Ask about "vesting" or in other words, how much of the account is yours and when it happens. You should always be 100% vested in the contributions you elect to divert from your paycheck. The matching funds however, might be subject to some restrictions.

As a bad example, I once worked somewhere with a 6% match. However, that match amount only vested after 5 years and was stuck in company stock only during the vesting period. Sure enough, after four years my employer went bankrupt during the dot-bomb recession and so those matching funds went to zero. Luckily, I had the good sense to put my elective contributions into index funds.

As a primer to 401K accounts and other basic money subjects, I recommend Personal Finance For Dummies by Eric Tyson. It's now a couple decades old but the basic principles still apply, and it will lay the foundation for you to gear up to a Mustachian direction if you want.

Future Lazy

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Re: 22 and about to have my first 401k - Help?
« Reply #4 on: November 19, 2014, 01:33:12 PM »
So I'm gathering that saver's credit is only on an IRA, not a 401k - and that's fine.

I still think it's weird that the matching is decided after the fact, but in the old memo that I dug up, the 7% is described as a "contribution" - so it's possible that it's not really matching, and just contributing despite what I agree to put in?

I highly doubt that my company would just be doing stock options - it's a private not for profit, and if there WERE stock options in anything, it would be established utility companies... Unlikely to crash/go under.

Is there anywhere I can read more about vesting?

I will do more research on the Roth pipeline - thanks! I'm familiar with Mad Fientist, and I've read his Roth pipeline stuff before, but it didn't make any sense to me at the time. I've been reading through the various IRA/401K threads that get posted here, but likewise, they go over my head a bit, since I've yet to experience what having a 401k is actually like. The idea of contributing to something so far off seems shady and untrustworthy, but I think that's just a generational perspective of "Retirements in jeopardy! Mass panic!" over the recession I grew up in, so... Yeah. It's a little bit confusing for me.

Thanks for answering!

Penny Lane

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Re: 22 and about to have my first 401k - Help?
« Reply #5 on: November 19, 2014, 01:41:42 PM »
And Kayla-- so great you are thinking about all this at your tender age!  Yay you!!  The dollars you put away now for your future self will grow a greater stache than if you had waited 20 years to start this.  Hopefully, your company uses a good firm like Vanguard or Fidelity.

juuustin

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Re: 22 and about to have my first 401k - Help?
« Reply #6 on: November 19, 2014, 01:46:15 PM »
So I'm gathering that saver's credit is only on an IRA, not a 401k - and that's fine.

I still think it's weird that the matching is decided after the fact, but in the old memo that I dug up, the 7% is described as a "contribution" - so it's possible that it's not really matching, and just contributing despite what I agree to put in?

I highly doubt that my company would just be doing stock options - it's a private not for profit, and if there WERE stock options in anything, it would be established utility companies... Unlikely to crash/go under.

Is there anywhere I can read more about vesting?

I will do more research on the Roth pipeline - thanks! I'm familiar with Mad Fientist, and I've read his Roth pipeline stuff before, but it didn't make any sense to me at the time. I've been reading through the various IRA/401K threads that get posted here, but likewise, they go over my head a bit, since I've yet to experience what having a 401k is actually like. The idea of contributing to something so far off seems shady and untrustworthy, but I think that's just a generational perspective of "Retirements in jeopardy! Mass panic!" over the recession I grew up in, so... Yeah. It's a little bit confusing for me.

Thanks for answering!

The 7% sounds like a year-end contribution by your employer.  It is essentially a bonus based on how the firm did that year.

In regards to the saver credit, I'm not sure where you are seeing it only applies to IRAs.  It definitely applies to employer-sponsored plans.  The IRS guidance is linked here: http://www.irs.gov/uac/Get-Credit-for-Your-Retirement-Savings-Contributions

In lay terms, it is up to a $1,000 credit ($2,000 joint) that is calculated based on how much you contribute and how much you make.  I'm sure the exact formula is on that page as well.

MustachianAccountant

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Re: 22 and about to have my first 401k - Help?
« Reply #7 on: November 19, 2014, 02:01:33 PM »
So I'm gathering that saver's credit is only on an IRA, not a 401k - and that's fine.
In regards to the saver credit, I'm not sure where you are seeing it only applies to IRAs.

Right. The saver's credit is for IRAs AND employer sponsored plans (401k's). You do need to meet income guidelines.

If you want the saver's credit for 2014, the ONLY way for you to get it is through contributing to an IRA, since you're not eligible for your employer's 401k until 2015. In 2015, you can quality for the credit through IRA contributions or 401k contributions.

Future Lazy

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Re: 22 and about to have my first 401k - Help?
« Reply #8 on: November 19, 2014, 02:07:00 PM »
So I'm gathering that saver's credit is only on an IRA, not a 401k - and that's fine.
In regards to the saver credit, I'm not sure where you are seeing it only applies to IRAs.

Right. The saver's credit is for IRAs AND employer sponsored plans (401k's). You do need to meet income guidelines.

If you want the saver's credit for 2014, the ONLY way for you to get it is through contributing to an IRA, since you're not eligible for your employer's 401k until 2015. In 2015, you can quality for the credit through IRA contributions or 401k contributions.

Okay, that's nice and clear and good to know. Thanks for helping me define that.

I definitely definitely meet the income guidelines. :)


And Kayla-- so great you are thinking about all this at your tender age!  Yay you!!  The dollars you put away now for your future self will grow a greater stache than if you had waited 20 years to start this.  Hopefully, your company uses a good firm like Vanguard or Fidelity.

Thanks! My mom is in her fifties and hasn't started at all. I refuse to be in the panic she's in when I am her age.

I don't think they're going to - it's through some other advisor that's cheaper than the one they've been using but is still charging multiple percents. Gross. That's part of why I'm wary of contributing much to it - I kinda seem to think I can do better on my own.

Pooperman

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Re: 22 and about to have my first 401k - Help?
« Reply #9 on: November 19, 2014, 03:30:05 PM »
Sorry if my answer before was confusing re: savers credit. As was said above (and what I meant), you can only use your IRA space because you have no 401k until next year to help reduce your agi. Roth pipeline generally works like this: 401k -> traditional IRA -> Roth IRA, wher you pay tax on th traditional to Roth conversion. You have to wait 5 years for Roth vesting once you convert (or face penalties). After 5 years, you can take out what you converted (called your 'basis' in IRS terminology), but not the gains without penalty (unless you are of age).

kkbmustang

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Re: 22 and about to have my first 401k - Help?
« Reply #10 on: November 24, 2014, 06:41:56 PM »
All retirement plans are required to file a Form 5500, which is basically an information return for the plan. As part of that filing, you can glean information about the retirement plan based on some of the codes used. The annual 5500 must be filed (with extensions) by October 15th of the year following the end of the plan year. The 5500s can be retrieved here since they are public information: http://freeerisa.benefitspro.com

Also, it is not at all unusual that your employer requires a six months of service before you are eligible for the plan and that, following the date you become eligible, you must hit what is called an entry date. Entry dates can be monthly, quarterly, every 6 months, or annually.

Once you are eligible AND hit the entry date, then you can participate in the plan. Information regarding the plan can be found in a Summary Plan Description (SPD). The employer is not obligated to provide you with an SPD until you are an actual participant in the plan (as opposed to the date you reach the minimum months or years of eligibility service). However, once you are a participant, they must provide you with a copy of the SPD and the Summary Annual Report (each year).

If a participant requests a copy of the SPD and the company does not provide it, the company may be liable for penalties from the Department of Labor.

Also, it is perfectly acceptable for the matching contribution to be discretionary and the amount to be determined each year, following the conclusion of the year. However, any participant who has satisfied the allocation requirements for that year (sometimes, including that they are employed on the last day of the plan year), should receive an allocation.