14 of the Most Common 401(k) Question and Answers

The 401(k) plans are a common and popular savings account offered by many companies. With their tax benefits, possible employer match, and higher contribution limits; the 401(k) outperforms other retirement saving plans. While these plans are popular, there are common 401(k) questions that many employees struggle with.

Without a full understanding of 401(k) plans work and what you should expect as an employee or employer; you might not take full advantage of these plans. That is why you need to know at least 401(k) basics and common 401(k) questions and their answers. If you are an employee and struggling with these common 401(k) questions, I will cover answers to these questions in this post.

Here are the top 13 common 401(k) questions and their answers.

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1. What is 401(k) and how does it work?

This is one of the top common 401(k) questions.

A 401(k) plan is a retirement saving plan offered and sponsored by employers. Most employers use 401(k) plans as a strategy to attract and retain talent.

Many employees also prefer companies with retirement benefits such as 401(k) plans. So, the plan tends to benefit companies and employees.

Before you can start making contributions to your 401(k) plan, your employer must approve you and help you sign up for the account. These plans are usually offered through a third-party company. For this reason, you cannot open a 401(k) plan by yourself without sponsorship from your employer.

Contributions to your 401(k) plan come directly from your before-tax wages or after-tax for Roth 401(k) through payroll deductions. This allows you to grow your retirement savings on a tax-deferred basis and reduce your taxable income at the same time. Keep in mind that you pay income tax on your distributions during retirement. Additionally, you will be required to take RMDs when you turn 73.

2. 401(k) common questions: How to borrow against my 401(k) plan?

Every dollar that is in your 401(k) plan is yours as long as it is vested. So, instead of taking an early withdrawal from your account and paying taxes and a 10% penalty if you are under 59 1/2, you can borrow against your own 401(k) plan.

To borrow against your 401(k) plan, talk to your HR or plan manager regarding requirements for 401(k) loans. The IRS allows you to borrow up to 50% of your account balance or $50,000 whichever is lower. For example, if your 401(k) account is $80,000, you can borrow up to $40,000. But, if your account is equal to $120,000, you can borrow up to $50,000 in 401(k) loans.

Keep in mind that the money you take out must be paid back to the account and you will have up to 5 years to pay it off. If you end up leaving your job before paying it off, you will have up the federal tax season deadline of the year you quit your job to pay off the remaining balance.

Any remaining balance after this date will be considered a withdrawal and 401(k) withdrawal rules will apply. Some employers also require that you submit a consent form from your spouse before you are allowed to borrow against your treatment plan.

Each 401(k) plan has its own rules and regulations regarding how many 401(k) loans you can take out. So, refer to your employer for more details on specific rules you need to follow.

3. What is an RMD on a 401(k) plan?

One of the most common 401(k) questions is what RMDs are and how they work. RMDs stand for required minimum distributions.

These are mandatory withdrawals you must take from your account every year when you turn 73. Failure to take RMDs may result in a 25% tax on the money you did not withdraw on time. The RMD penalty was changed in March 2023 from 50% to 25% or 10% if you can correct the RMD errors within 2 years.

Other accounts that require RMDs include the following.

401(k) plans
457(b) plans
403(b) plans
Traditional IRA based-plans
SARSEPs
SIMPLE IRAs
Profit-sharing plans

Starting in 2024, non-IRA Roth accounts will no longer require RMDs when you turn 73, according to the Internal Revenue Service. These accounts include the Roth 401(k) plan and the Roth 403(b) plan.

4. What does it mean to be vested in a 401(k) and what are vesting schedules on 401(k) plans?

Just because your employer matches your contributions by a certain percentage, it does not mean the money is yours right away. Some companies have what is known as vesting schedules or vesting periods.

This is the amount of time you must work for the employer before the employer match becomes 100% yours. If the vesting period is six months, for example, it means you must work in the company for 6 months before you fully vested.

Other employers have different vesting schedules where you earn the match gradually. For example, you can get 25% after six months of service, then 50% after one year, 75% after 1.5 years, and then finally 100% after 2 years.

If you leave your job before you are fully vested, you may end up losing some or all unvested balances in your account. Each employer has its own vesting schedule rules.

5. When can I start taking money out of my 401(k) plan?

This is another 401(k) question that everyone should know the answer to. The IRS has regulations for every retirement plan and penalties are in place for those who violate the terms of their plans.

The money in your retirement plan is designed specifically for retirement. Unless you have reached the appropriate age for retirement, you should stay away from your retirement savings.

To take your 401(k) income without a 10% penalty, you must be at least 59½. The only exception to this rule applies when you become permanently disabled, or unable to work.

Since you never paid taxes on your contribution or employer match, you will pay income tax on your 401(k) distributions.

If you are still working or don’t need to take distributions when you turn 59½, you will be required to take mandatory withdrawals when you turn 72. These mandatory withdrawals are known as Minimum Requirement Distributions or RMDs. The IRS imposes RMDs to recover taxes you did not pay on your contributions and employer match.

6. What is my company’s role in my 401(k)?

401(k) plans are employer-sponsored plans. This means employers open and manage these retirement plans on behalf of their employees.

Some employers also choose to match their employees’ contributions up to a certain percentage. For example, your employer can match your contributions up to 6% of your gross income. Any money an employer puts in your account becomes free money for you.

7. Common 401(k) questions: Are all 401(k) plans created equal?

This is one of the most important 401(k) questions that thousands of people struggle with. 401(k) plans are not created equal. Each company designs its plan and puts requirements in place to maximize returns from employees but also offer value at the same time.

The following are four main points that distinguish 401 (k) plans.

Employer match. Employers are not required to match your contributions. However, some employers choose to contribute to their employees’ accounts up to a certain percentage.

Different matching percentages. Even if most companies choose to match their employee’s contributions, the matching percentages differ from one company to another. Some companies especially highly profitable ones offer a dollar-to-dollar match. For example, if you contribute $500 every paycheck, your employer could put aside the same amount. Others choose to contribute about 3% to 6% of your gross income.

Vesting schedules. Some employers have an immediate vesting system. This means you are 100% vested as soon as the employer match appears in your account and you can take it when you leave your job. Other companies, on the other hand, put in place vesting rules where you need to work in a company for a given number of months or years before you are fully vested. Finally, some companies require you to work for a given time before you are allowed to even join the plan.

401(k) loans. Most plans allow 401(k) loans. However, some do not allow borrowing against your retirement account. Those that allow 401(k) loans have different rules of how many loans you can take in a given time.

8. When do I need to start contributing to my 401(k) plan?

When should you start contributing to your 401(k) plan? The answer to this 401(k) question is simple: As soon as you are approved and able to contribute.

Before you make any contributions to the plan, you must first be approved by your company. Once your company approves you, you start making contributions as soon as possible.

This is because retirement savings benefit you through long-term investments. What makes long-term investments better is Compound interest.

To take full advantage of compound interest, you must start as soon and early as possible. Even if your current financial situation does not allow you to make higher contributions, contribute a small amount.

Every dollar you put toward retirement matters. No matter how small your contributions are, they will grow. Remember, you are not investing for tomorrow. You are putting money away for a very long time.

More on compound interest: Compound Interest Definition

9. What is the maximum can I contribute to my 401(k) plan

One of the most common 401(k) questions you need answers to is the maximum contribution you can make to your plan. Just like any other retirement plan, there is a limit to how much you can contribute to your 401(k) plan every year.

For 2024, the 401(k) contribution limits are $23,000. If you are 50 or older get an extra $7,500 catch-up contribution. In other words, if you are 50 or older you can contribute up to $30,500 to your 401(k) plans. For 2023, you can contribute up to $22,500 or $30,000 if you are 50 or older.

10. 401(k) questions: Are my 401(k) contributions tax deductible?

Yes, contributions to your 401(k) plan are tax deductible. Every dollar you contribute to your pre-tax 401(k) comes from your paycheck before tax wages and is tax deductible.

If you have a Roth 401(k) plan, however, your contributions will not be deductible because they come from after-tax wages.

When you are filing your taxes, the portion that went to your pre-tax 401(k) will not be taxed. At the same time, you will not have a deduction because you contributed to the account. Instead, the income that will be considered during your tax process is the remaining amount after contributions were taken off.

In other words, contribution to your 401(k) plan will directly lower your taxable income. If you are in a higher tax bracket, you might end up in a lower tax bracket due to pre-tax contributions.

11. common 401(k) questions: What happens to my 401(k) plan when I quit my job?

It is more likely that you will not work in the same company for the rest of your life. You might get a better opportunity, get laid off, or get fired. So, what happens to your old 401(k) funds after you leave your job?

When you quit or simply leave your job, you will have one of the following options for your old 401(k) plan.

Roll over the money to your new employer’s 401(k) plan
Keep the money with your old employer(with this option, you will not make any other contributions to the plan)
Cash out (you must avoid this option as much as you can due to tax and a possible 10% early withdrawal penalty)
Roll over the money into an individual retirement account(traditional IRA or Roth IRA)

12. Do all companies match 401(k) contributions?

By default, companies are not required to match their employees’ contributions. However, most employers add matching contributions to their retirement packages as a means to attract and retain good employees. Each employer that offers 401(k) plans must go through the annual nondiscrimination tests.

These tests are designed to make sure that the plan and matching contributions are not there to only benefit a small group of people or highly compensated employees.

13. What should I do with the money in my 401(k) plan?

The money in your 401(k) plan should be invested. That is the only way you will take full advantage of the plan. If you keep the money in the account without investing it, there will be no difference between your plan and a savings account.

Every 401(k) plan comes with investment options tied to the account. You must choose some of these investment options and invest according to your preferences. The investment options in your account will include Exchange Traded Funds(ETFs), Mutual Funds, Index Funds, etc. 401(k) plans do not have individual securities such as stocks due to the high volatility and exponential risks they possess.

What some employers do is offer their stocks to their employees at a discount.

Some funds in the account will be passively managed whereas others will be actively managed. Actively managed funds tend to come with higher fees due to continuous investment activities regarding your investments.

14. Common 401(k) questions: How much should I contribute?

The amount you contribute to your 401(k) plan will depend on a few factors:

Your current financial goals and retirement savings plans
Contribution limits to 401(k) for the year you are making contributions. For 2024, you can contribute up to $23,000 to your 401(k) plan or $30,500 if you are 50 or older.

How much can you contribute? The simplest answer to this question is as much as you can afford. This is because your retirement contributions are one piece of the puzzle in your financial world. Other financial matters require capital throughout the year.

If you contribute more than you can afford, you will not be able to cover other financial needs. When this happens, you might end up withdrawing your money early to cover those expenses.

It is always a good idea to contribute at least to the employer’s match. This is because the matching contribution is free money, and therefore, you should never leave free money on the table.

Saving 10% to 20% of your income toward retirement is a general rule. If you can afford more, then increase your contributions.

Instead of keeping all your money in a 401(k) plan, you can also look into individual retirement accounts or IRAs. These accounts will offer you different tax benefits and come with more flexibility when it comes to investment options.

More reading: How much should you contribute to your 401(K) account