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401(k) Plan Information
401(k) FAQ

There's lots to know about 401(k) plans.  If you don't see your question answered here, drop us an email to answers@simple401k.com.  We'll do our best to provide an answer and post it right here.  You can also check out the SIMPLE 401k blog to look for your answer.
Q:  What is the contribution limit for 401(k) plans for 2006?

A:  The contribution limit increased steadily until 2006.  The contribution limit for 2006-2010 is $15,000 (indexed by $500/year starting in 2007) with an age-based catch up contribution for those over age 50 (note: if you will be 50 during the calendar year, you can contribute the age-base catch up contribution throughout the entire year).  However, depending on your employers plan, your contribution may be limited due to testing on the plan (see 401k Plan Administrator for more info).  Your age-based contribution can always be made.

Q:  How can I get money out of my 401(k)?

A: Generally, there are 2 types of distributions from 401(k) plans: loans and withdrawals. 
401(k) Loans:
Many 401(k) plans allow loans which are disbursed tax-free contingent upon their timely repayment.  If a 401(k) loan defaults, the default amount becomes a taxable distribution / withdrawal (see below).
401(k) Withdrawals:
Income taxes are due any time a withdrawl is made from a 401(k) plan (this does not apply to qualified Roth 401(k) withdrawals).  In addition, if you are under the age of 59 1/2, a 10% federal penalty will usually be assessed.  For exceptions, see 401(k) Plan Participant.


Q:  Is it possible to be a 401(k) millionaire?

A: Yes.  See the chart below:








This chart assumes various contributions (left column) and various time periods invested.  It also assumes an 8% investment return and no increase to the contributions over the years.  It is not indicative of performance in any specific investment.  For illustrative purposes only.


 
Monthly Contribution
10 Years
20 Years
30 Years
40 Years
$250 / Month
$46,936
$148,268
$367,037
$839,343
$500 / Month
$93,872
$296, 537
$734,075
$1,678,686
$1250 / Month (max)
$234,682
$741,343
$1,835,188
$4,196,716
Q:  Should I contribute to my 401(k) or an IRA?

A:  Each plan has it's pros and cons but as a general rule of thumb, you should contribute at least enough to get the full employer matching contribution in your 401(k) before funding an IRA.  Then, if you qualify for tax deductible IRA contributions it would be appropriate to fund the IRA.  With Roth 401(k) plans, the advantage is a higher contribution limit than a Roth IRA and the tax benefits are the same.  Of course, you'll want to weigh the suitability and quality of investment selection in your 401(k) plan before making that decision.  Consult a qualified financial professional.

Q:  How should I invest my 401(k)?

A: Most 401(k) providers do not also provide investment advice, though this is changing in the industry through advice programs.  Since everyone has a different situation (age, health, risk tolerance, goals, values, etc) there is no blanket recommendation for how to invest your assets.  If your plan does not offer access to financial advice, either though an automated program or a real advisor, it is recommended that you consult a financial planner to help you assess your own situation.

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