What Most People Don't Understand About 401(k) Plans

What Most People Don't Understand About 401(k) Plans

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A 401(k) plan is something that not everyone has. In fact, an incredible 68% of Americans are not saving in an employer-sponsored retirement plan.

According to current statistics, there are one in three Americans who have saved $0 for retirement. But interestingly, of those who are saving, a growing percentage is Millennials, especially in the 401(k) plan arena. 

Here are four things everyone should understand about these plans:

1. Rollover

When you leave your employer, you can transfer your 401(k) plan to an individual retirement account, and it is not a taxable event. This type of transfer is called a rollover. Many 401(k) participants think any type of distribution from their 401(k) plan is taxable and subject to penalties. That isn’t true.

All plans allow rollovers to an established IRA account. Usually, the check is made payable to the new financial institution as the custodian, with a "for benefit of" or FBO to you. If you have a few 401(k) plans from former employers, consolidating them into one IRA account is one option. That will make it far easier to handle address and beneficiary changes, manage investments, and track distributions once you are retired.

2. Withdrawal Age

Most people think that if they take a withdrawal from a 401(k) plan before age 59½, a 10% early withdrawal penalty tax will apply. This isn’t always true for 401(k) plans. There is a special provision in 401(k) plans for people who leave their employer after they reach age 55 but before they reach age 59½. This rule allows you to take withdrawals that are exempt from the penalty tax without having to use the substantially equal payment provision.

3. Creditor Protection 

Your 401(k) plans are creditor-protected by law. This is why it can be foolish to use 401(k) money to avoid foreclosure, pay off debt, or start a business. In the case of future bankruptcy, your 401(k) money is a protected asset. Don’t touch your 401(k) money except for retirement. 

4. Employer Contributions

A big mistake from younger investors is that many just do not fully understand the benefits of a 401(k). Many companies will match your 401(k) contribution up to a specific percentage, which is free money that you should be taking advantage of.

Executive VP of David Lerner Associates, Martin Walcoe, says, “In order to make the most of your employee sponsored 401(k) plan, you should always contribute the maximum amount that the company will match, if you can. You should think of this money as part of your compensation, and you don’t want to walk away from money your employer is willing to pay you.”



Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner
Associates, Inc. This material does not constitute an offer or recommendation to buy or sell
securities and should not be considered in connection with the purchase or sale of securities. 

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. 

Each taxpayer should seek independent advice from a tax professional based on his or her
individual circumstances.

These materials are provided for general information and educational purposes based upon
publicly available information from sources believed to be reliable-- we cannot assure the
accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC



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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates Call 516-921-4200 Visit our website: www.davidlerner.com

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Jake Mendlinger
Account Manager
516.829.8374 X 232

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