401(k) and Roth IRA Frequently Asked Questions

This is a continuation of a post at Blueprint for Financial Prosperity called Six Roth IRA and 401(k) Questions Everyone Asks. The following are a few questions I hear often that are very basic but often require some explaining:

How much money can I put into my 401(k)/Roth IRA account?

The 2007 contribution limit for a 401(k) is $15,500. This amount is indexed for inflation and rises in $500 increments. Those 50 years old or older can contribute an additional $5,000 as a “catch up” contribution.

The 2007 contribution limit for a Roth IRA is $4,000. This amount is also indexed for inflation, although it has had the same limit for the past few years. Those 50 years old or older can contribute an additional $1,000 as a “catch up” contribution.

Can I take a loan out if I am strapped for cash?

Some 401(k) plans allow you to take out a loan and pay yourself back with interest. If, however, you are unable to repay the loan, the loan becomes a distribution and is subject to income taxes and penalties.

Roth IRAs allow for early distributions, but not loans. Generally speaking, an early distribution will be subject to income tax and a 10% penalty. There are some exceptions.

If I leave my company, what happens to my 401(k)?

If you are joining a different company that provides a 401(k), you can rollover the funds from your previous plan to the new plan.

If your new employer does not offer a 401(k), you can rollover the funds into a Traditional IRA or a Roth IRA. If you choose the Traditional IRA, there is no tax due at the time of rollover. If you choose the Roth IRA, there will be tax due since you are transferring from a tax deferred 401(k) to a non-tax deferred Roth IRA. Keep in mind that in order to rollover to a Roth IRA, you must first rollover into a Traditional IRA and then into a Roth IRA.

Is investing in a 401(k) or Roth IRA safer than investing in a brokerage account?

Absolutely not. Within the 401(k) or Roth IRA, your funds are invested in similar investments that you would have within a brokerage account such as mutual funds, stocks, bonds, etc.

Visit here to get the answers to more frequently asked questions about 401(k)s and Roth IRAs.