Some 401(k) Less Frequently Asked Questions

Nick Ozer, MBA, CFP®

Nick Ozer, MBA, CFP®

Managing Partner, Financial Advisor & Director of Retirement Plans

As an advisor who manages more than 40 company retirement plans, I have received every question imaginable. Here are some less Frequently Asked Questions that may be equally beneficial to you:

What does “money source” mean and why should I care? A money source is the coding for each dollar inside of your 401k/retirement plan. It describes how your dollars will be treated if you 1. Leave the company or 2. Take a distribution.

  1. If you leave your company, you will want to know which dollars you can take with you. Employee contributions (your contributions) are always yours to take. Employer contributions depend on a vesting schedule. Vesting (in the 401k world) asks the question: how long must you be employed for all/ some of your employer contributions to be yours when you terminate your employment? This vesting schedule can be different for your company’s match or your company’s profit share. It may take up to 6 years for all their contributions to fully vest.
  2. When taking a distribution, you will want to know if the dollars are pre-tax or after-tax. Pre-tax dollars are all taxable at the time of distribution at whatever your income tax rate is in that year. These include your pre-tax 401k contributions and your company’s match/ profit-sharing contributions. Your own Roth contributions will never be taxed (so long as your distributions are after 59.5 years old) since they were taxed at the time of contribution. After-tax contributions are divided into two buckets: your contributions and the investment gains. Your contributions will not be taxed but the investment gains will be taxed at your income tax rate. Helpful tip: you may convert your contributions to Roth dollars so the investment gains begin to grow tax-free.

The time value of money suggests I should contribute the maximum amount to my 401k as early as possible in the calendar year. Is that always a good idea? The short answer is no. Many plans (but not all) calculate their match on a per-payroll basis. That means if you max out your 401k early in the year, you will be forgoing your company’s contribution to your account. Example: In 2022, you contributed all $20,500 of your employee contributions to your 401k by June 30th. If you earn $200,000 in 2022 and your company matches 4% on a per-payroll basis, you would have missed out on $4,000 of the total $8,000 available to you. In this case, the best strategy is to spread the maximum amount across all your paychecks for the year.

I plan on working into my retirement. Can I avoid taking RMD from my 401k? Yes! As you all know, you will be required to start taking distributions from your pre-tax retirement savings at 72 years old. However, if you don’t own more than 5% of the business, you can forever defer your RMDs if you are still employed. This strategy allows you to have significantly more flexibility with how much taxes you are forced to pay.
Creative examples: Can you sell your business but stay on as an employee to keep deferring your 401k taxes? Can you work part-time to have a 401k available to you? Financial planning and foresight may do a lot to help.

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