Common Myths About 401(k) Retirement Plans Debunked
This article corrects common misconceptions about 401(k) plans, including ownership upon departure, usage for expenses outside retirement, contribution limits, and combined plan contributions. Understanding these facts helps workers better plan their retirement savings.
Common Myths About 401(k) Retirement Plans Debunked
Many 401(k) plan participants lack full understanding of their options, leading to prevalent misconceptions. How well do you truly understand your 401(k)? Let’s clarify some common misunderstandings.
My 401(k) balance is fully mine when I leave my job: This is a common misconception. Ownership depends on your plan’s vesting schedule. While your personal (Roth/pre-tax) contributions are always yours, employer contributions may require several years of service before they fully vest.
Using a 401(k) for major expenses like home purchases or college funds is advisable: This is misguided. 401(k) plans are designed for retirement savings. For significant expenses such as a house down payment or college tuition, consider options like a 529 plan to preserve your retirement funds for their intended purpose.
Contributing to a 401(k) limits my ability to contribute to an IRA: Not true. Contributions to a 401(k) do not restrict IRA contributions. However, your or your spouse’s participation in a 401(k), combined with income levels, can impact your ability to deduct traditional IRA contributions.
Minimum contributions equal the employer match: Many think that contributing only up to the employer match, typically 6%, is enough. Ideally, employees should aim to contribute around 15% of their income, regardless of the employer’s contribution, to optimize retirement savings.
Having two jobs with two 401(k)s means I can defer up to $18,000 per plan: This is another misconception. The combined limit across all employer-sponsored plans (including 401(k), SIMPLE plans, SARSEPs, and 403(b)s) is $18,000 (as of 2017). If you have multiple plans, the total contribution across them all should not exceed this limit. For example, in 2017, having both a 401(k) and a 457(b) plan allows for up to $36,000 in total deferrals, excluding catch-up contributions.
