Retirement Quiz: Challenge Your 401(k) Smarts!
1. A 401(k) plan is…
A 401(k) is a retirement plan for employees of for-profit companies. Public schools and many 501(c) tax-exempt organizations use a 403(b) retirement plan, also known as a tax-sheltered annuity (TSA). State and local government retirement plans are generally 457 plans.
2. A matching contribution takes place when…
With a matching contribution, your employer makes a deposit into your account based on the percentage you contribute, up to a stated maximum. Although some employers make matching contributions equal to the employee’s contribution it is not a requirement for matching nor universal, hence the first answer would not always be correct.
3. Which of the following is true regarding 401(k) loans?
The IRS limits the amount you can borrow from a 401(k) plan to 50% of your vested balance or $50,000, whichever is less. While 401(k) loan provisions are common, 401(k) plans are not required to have this feature.
You can have multiple 401(k) loans at the same time. However, loans are aggregated to determine the limit, the total of your 401(k) loans cannot exceed 50% of your vested balance or $50,000.
You do not need good credit, nor are 401(k) loans subject to limited purposes. Loans must be repaid within five years, except for loans for the purchase of a primary residence, where the repayment term may be longer.
4. Lebron James and Stephen Curry open a 401(k). What’s the minimum amount that the NBA must contribute to the plan each year?
There is no minimum contribution requirement for employers. Employers may make contributions to all participants or they may make matching contributions. Or they may do both or not contribute at all.
5. What does “vested” mean?
To be vested means to have complete ownership of all funds in your 401(k). You are always immediately vested in your own contributions. Employer contributions may vest immediately or vest over time in accordance with your plan’s vesting schedule.
The first answer is incorrect because you are always vested in your contributions, this answer ignores employer contributions, which may be subject to a vesting schedule. The second answer cannot be correct because you always own your contributions.
6. True or False: When you quit your job, your 401(k) automatically carries over to your next employer.
When you quit your job, your 401(k) does not automatically carry over to your next employer. In many cases you may be able to roll over your old 401(k) to your new employer. You can roll over your 401(k) into an individual retirement account (IRA). You may leave your 401(k) where it is, except that plans may terminate accounts with small balances. So, if you have $5,000 or less in a 401(k) leaving it there may not be a viable option.
7. You get a job with Beyoncé's company, Parkwood Entertainment, and are offered a 401(k) plan. You can enroll immediately if…
Employers determine the waiting period before you can begin contributing to their 401(k) plans, but the waiting period cannot be longer than one year. It may be based upon calendar time or upon hours worked.
8. The maximum amount you can contribute to a 401(k) plan annually if you are under 50 is…
The IRS limit on elective deferrals into a 401(k) plan is $18,500 for 2018. This may be increased in future years for inflation. In addition, participants who are 50 or older at the end of the plan year may make additional catch-up contributions of up to $6,000. This number may also be indexed for inflation going forward. Also note that these are IRS limits, some plans may limit contributions to lower amounts.
9. Stacy's mom, who recently turned 45, decides to take out a 401(k) loan so that she can treat Stacy and her friends to the VIP experience with Taylor Swift. What happens if Stacy's mom can't repay the loan?
The purpose of the loan isn’t relevant, if the employee doesn’t pay the loan back it will be treated as a premature distribution and subject to income tax. In addition, as the participant in this scenario is under 59 1/2 years of age she will also be subject to a 10% premature distribution penalty.
It is also important to note that 401(k) loans are generally taken via payroll deduction, so this is generally not an issue for those who remain employed with the employer. It can be a big issue for those who leave the employer and don’t have the resources to pay off the loan.
10. Your waiting period – or the time between your hire date and when you can enroll in a 401(k) plan – ends when…
Employers determine when you are eligible to participate in their 401(k) plan, so the rules do vary by employer. The IRS does not allow for this to be a period of longer than one year, but it could be immediately or up to one year.
11. At what age can you generally take distributions from your 401(k) without incurring a premature distribution penalty?
Generally, you can take distributions from your 401(k), or other retirement plans, without incurring a premature withdrawal penalty if you are age 59 1/2 or older. You may take distributions from a qualified plan, including a 401(k), and not be subject to penalty at age 55 or older if you are separated from service with the employer. But that is not the general case, so the correct answer is 59 1/2.
12. It may make sense to borrow from your 401(k) if…
It may make sense to borrow from your 401(k) if you are in a financial bind and have no better options. The other three choices are to use the proceeds of the loans for consumption – and it is never a good idea to rob from your retirement to spend unnecessarily in the present. There may be other situations where a 401(k) loan is appropriate, but think it through very carefully, understand the risks, and be certain you have no better options.