401(k) Programs
What is a 401(k)?
What are the tax benefits to me?
Will joining this program affect my Social Security taxes and benefits?
Tell me more about tax-deferred growth.
Can I contribute to an IRA if I am participating in a 401(k) program?
Can I leave my money to my heirs or do I have to use it for retirement?
What happens to my account if I die?
What happens if I change jobs?
Does my company have access to my 401(k)?
Contributions
How do I contribute to a 401(k) plan?
What's the real benefit of pre-tax contributions?
How much can I contribute on a pre-tax basis?
Can I stop or change the amount of my contributions?
Can I transfer money from my savings account into my 401(k) program?
Withdrawals and Loans
What if I need my money?
What is a (financial) hardship withdrawal?
How will I be taxed when I withdraw my money?
When I withdraw my funds, can I roll them over to an IRA?
Other than a rollover, what withdrawal options do I have?
401(k) Programs
What is a 401(k)?
A 401(k) is a retirement savings program provided by your employer that allows you to save pre-tax dollars for your retirement, thereby reducing your current federal taxable income. Your money is invested in funds chosen by you and grows on a tax-deferred basis until you start receiving distributions, usually at retirement. The term, 401(k), simply refers to the section of the Internal Revenue Code that allows this type of program and qualifies it for certain exemptions under federal laws.
What are the tax benefits to me?
A 401(k) gives you two tax benefits:
- You do not pay current federal income tax on amounts you defer (certain states may allow deferral of state income taxes as well).
- You do not pay current federal income tax on the earnings on your deferral dollars.
You will be required to pay income tax on your 401(k) money when you take withdrawals. If you take withdrawals before age 59½, you may have to pay a 10% IRS penalty tax.
Will joining this program affect my Social Security taxes and benefits?
No. Social Security taxes are based on your full salary without taking into account the amount you have deferred. For example, if you defer $3,000 of a $20,000 salary, your W-2 will show taxable income of $17,000 instead of $20,000. Social Security tax (FICA), however, is calculated on the entire amount of $20,000.
Tell me more about tax-deferred growth.
If you participate in a 401(k), you may pay less current tax and your savings may grow much faster, leaving you more money for your retirement. This hypothetical illustration compares taxed and tax-deferred growth of investing $100 per month for different periods. The investment periods all earn a hypothetical annual effective interest rate of 8% (which is not indicative of any particular investment) and are taxed at a 28% interest rate. It does not reflect product charges or expenses, which can lower tax-deferred performance.
The below chart is for illustration purposes only and should not be used to project or predict investment results. With actual investments, returns and principal value fluctuate and units (or shares) may be worth more or less than their original cost at any time.
Tax-deferred accumulations are taxed as ordinary income at withdrawal. It is possible that contract holders may be in a lower tax bracket at the time the funds are withdrawn. A 10% federal tax penalty may apply to amounts withdrawn prior to age 59½. Accumulations in a tax-deferred retirement program are typically for retirement purposes and are usually not withdrawn in one lump sum. For comparison purposes, this illustration shows the taxes that would be paid on a lump sum withdrawal after 30 years, given the same tax bracket. Individuals also have the option to spread their withdrawals over a number of years and potentially reduce their tax liability.
Changes in tax rates and tax treatment of investment earnings (e.g. lower maximum tax rates on capital gains and dividends) may impact the comparative results. Investors should consider their personal investment horizon and income tax brackets, both current and anticipated, when making an investment decision as these may further impact the results of the comparison. Consult your tax advisor for more information.
Can I contribute to an IRA if I am participating in a 401(k) program?
Yes, you may contribute to an IRA if you also have a 401(k), but whether or not your IRA contribution is deductible depends on your income level. If you are ineligible to deduct your traditional IRA contribution, you may still make a non-deductible contribution. Your spouse, whether or not working, may contribute to a deductible IRA if your joint Adjusted Gross Income (AGI) is below certain levels or if they work, but do not have a retirement program. You may also contribute to a Roth IRA if your AGI is below certain levels. Contact your financial representative for more information.
Can I leave money to my heirs or do I have to use it for retirement?
The IRS requires that you begin taking distributions from your program by April 1st following the year you reach 70½ or retire, whichever is later. The amount that you must withdraw is based on an IRS formula. Contact your financial representative for more information.
What happens to my account if I die?
In the case of your death, your account is transferred to your designated beneficiary.
What happens if I change jobs?
When you leave your company, you may roll your account over to an IRA or other eligible program. If your account balance is $5,000 or more, you may leave your money in the program. If you do not have the withdrawal rolled directly into your IRA or a new program, the IRS imposes a mandatory 20% withholding tax.
Does my company have access to my 401(k)?
The amount you contribute to your 401(k) program and any investment earnings on those contributions always belong to you no matter what changes occur in your company's business structure or operations.
Contributions
How do I contribute to a 401(k) plan?
It's simple. You choose to "defer" a percentage of your current pay directly into the program. This amount is automatically deducted from your paycheck before taxes are calculated.
What's the real benefit of pre-tax contributions?
Pre-tax contributions are deducted and invested directly from your paycheck, making saving for retirement easy and painless. And because your contribution is subtracted from your paycheck before taxes, pre-tax contributions may actually allow you to save more than traditional after-tax investments.
For example, consider a person earning $2,000 per month with a federal income tax rate of 28% who wants to save $100 a month in his or her 401(k). Putting this amount in a 401(k) instead of a regular after-tax investment saves a hypothetical $28 per month, or $324 in federal income taxes each year.
How much can I contribute on a pre-tax basis?
Federal legislation now allows that up to 100% of employees' adjusted gross income may be contributed on a pre-tax basis, not to exceed the amounts listed in the chart that follows. The chart contains the dollar limits set by the IRS until 2006, along with the amount allowed for any catch-up contributions. Catch-up contributions are allowed by those who are 50 or older in the given program year. The actual contribution amount may vary based on your employer's specific program design.
State laws may further limit your eligibility/deductibility. Please consult your tax advisor for your particular state's limits. Review IRS Publication 590 or contact your tax advisor to determine your eligibility to make a deductible contribution.
Can I stop or change the amount of my contributions?
Yes, you can stop or change your contribution at any time by accessing your online account (found either at
www.symetra.com or
www.symetra.com/mfretirement depending on your account type). Your employer's program may limit how often you can change the amount of your deferral contributions.
Can I transfer money from my savings account into my 401(k) plan?
No. All contributions to your 401(k) must be deducted from your paycheck or made by your employer.
Withdrawals and Loans
What if I need my money?
Your 401(k) is designed to help you accumulate long-term savings. To maximize the benefits of tax-deferred savings features and avoid possible tax penalties, you should leave your money in the program until you begin taking withdrawals during retirement. However, your program may allow for loans, financial hardship or in-service distributions.
Loans
Your employer may allow you to borrow money from your account and "pay yourself back" at a reasonable interest rate. The maximum loan amount cannot be more than 50% of your vested account balance, not to exceed $50,000.
Withdrawals
Because your 401(k) is designed to meet long-term savings goals, withdrawals are only allowed if:
- You retire
- You terminate your employment
- You die, in which case your beneficiary will receive your contributions and earnings
- You become permanently disabled
- You experience financial hardship, as defined by the IRS
What is a (financial) hardship withdrawal?
A hardship withdrawal is one that is made because of an immediate and heavy financial need that cannot be satisfied from other resources. Examples of immediate and heavy needs are:
- Medical expenses for you and your family, not reimbursed by insurance
- College tuition for the next 12 months for you, your spouse, your children or dependents
- Payments that are necessary to prevent foreclosure or eviction from your primary residence
- Purchase of your primary residence
How will I be taxed when I withdraw my money?
Any amounts withdrawn from the program, including hardship withdrawals, will be taxed to you as ordinary income. For example, if you withdraw $15,000 in the current year, this amount will be included in your gross income for tax purposes. You may also be subject to a 10% IRS penalty tax if you are under age 59½.
When I withdraw my funds, can I roll them over to an IRA?
Yes, you can generally rollover any percentage of your distribution into a traditional IRA. Certain distributions such as hardship withdrawals, however, are not eligible for rollover and are fully taxable to you. Any amount not rolled over may be subject to tax. Contact your financial representative for more information.
Other than a rollover, what withdrawal options do I have?
Your program may allow you to select various forms of withdrawal. Generally, options include a variety of annuity, systematic withdrawal or lump-sum distribution options.
