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In our last blog posting we discussed the basics of what a 401k plan is and how contributions work on both the employeeiStock_000000066902Small and employer side.

Now that we know how money is deposited into our 401k accounts let’s look at what the options are with the money going forward.

Once payroll deferrals are set up the contributions will flow from your paycheck to your 40(k) account.   It is then up to the employee to determine how their money is invested inside the plan.  It is important to utilize all enrollment materials, website information, and anything else being offered to understand what your options are and make educated decisions on how to invest.  You are then free to make changes to your investment options at anytime within the plan but most plans are set up so that you can only change the amount you defer from your paycheck during specific times of the year.

Under most plans loans can be taken in order to access your funds while you are still employed.  Typically the loans are limited to 50% of the total vested account balance with a maximum loan amount of $50,000.  The loan is then paid back over a set period with interest.  If you leave the employer before the loan is paid off, you will need to pay the entire balance back immediately.

Other than a loan, once contributions have been made into the plan they typically cannot be withdrawn unless the employee has reached a specific age (usually 59 ½) or they leave the company.

If you leave your employer you do have several options:

  1. Rollover your funds into a 401(k) account with your new employer
  2. Rollover your funds into an existing or new IRA account
  3. Leave the funds in your previously employers account

All of these options can be done without incurring any penalties or additional tax liability.  If instead you decide to take a cash distribution before you reach age 59 ½, you may be subject to a 10% early withdrawal penalty as well as having the distribution taxed as regular income.  The combination of the two can whittle your account value by almost half so when at all possible it is best to roll the money into another retirement vehicle.