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Retirement Plans Services FAQ

Frequently Asked Questions

Q. I've noticed the word "vesting" on many of my 401(k) plan forms. What does that mean, and what does it have to do with the money that I've put into the plan?

A. Vesting simply means ownership. The money that is deducted from your paycheck for the 401(k) plan is always 100% vested. This means it is and always will be 100% yours. However, if your company adds a matching or profit sharing contribution, there may be a vesting schedule. In other words, you may not have 100% ownership of those company contributions right away. You gain ownership (vesting) by providing years of service to your employer. Although vesting schedules vary, you will be 100% vested no later than after seven years of service.


Q. I am currently enrolled in my company's 401(k) plan, but I am planning to move soon and leave my present job. How soon will money be distributed from the plan?

A. It depends on your plan and the laws that impact your plan. In some instances, when you leave the company, the vested portion of your account (see question above) is payable to you following the next valuation of the plan. Some plans are "valued" on an annual basis, while others are done on a semi-annual, quarterly, or even a daily basis. Before you leave employment, check with your employer for details.

Q. Is it possible to check on my Social Security benefits to see how much I will receive when I retire and to make sure that I have been credited for all my contributions?

A. You can and we suggest you do. The Social Security Administration (SSA) keeps a record of employee contributions going back to 1937, or 1951 for self-employed individuals. Call the SSA at 800-772-1213 and request form SSA-7004, which is titled "Request for Earnings and Benefit Estimate Statement." Complete this form, mail it in, and in about six to eight weeks you should receive a statement of the contributions and earnings that the SSA has on record for you. It will also calculate your estimated monthly benefits if you retire at age 62, 65, or 70. It might not hurt to check the SSA's figures by comparing them to your old tax returns, pay stubs, and W-2 forms.

Q. I have a second job and I am now eligible to participate in the 401(k). I am also in a 401(k) at my other job. Are there any limits as to how much I can contribute to the second 401(k)?

A. Yes, the IRS does impose limits on these amounts which are adjusted for inflation annually. Your 401(k) payroll deduction limit for 2000 is $10,500. Also the total contribution amount which can be added to both retirement plans is either $30,000 or 25% of compensation, whichever is less.

Q. I recently started work for a company with a 401(k) plan. I have money in a previous employer's 401(k). Can I roll the money from that plan into my new employer's plan?

A. Yes, depending on several different factors. You must contact the plan administrator of your current employer to make sure the plan accepts rollovers. If it does, you will need proper documentation showing that your previous employer's retirement plan is a "qualified plan". All that may be needed is the paperwork which you received with the distribution. With this information, you new plan administrator will be able to determine whether you can rollover. If you can, your plan administrator can provide any necessary forms for your completion. Your can also rollover from a "conduit IRA. " A conduit IRA is simply an IRA which holds only the employer distribution from a qualified retirement plan. In other words, NO active $2,000 per year type deposits were made to the IRA. You do not have to wait until you are eligible for your current employer's plan to roll into it. Rather, you just need to have started work at your new employer.

Q. I am remodeling my home and will need to borrow to cover the costs. My 401(k) plan allows loans. Should I take advantage of this option?

A. There are several disadvantages to taking a loan from your retirement plan. The dollar amount "loaned" is no longer invested in stocks and bonds. Yes you are paying yourself interest, but you don't get ahead paying yourself interest, you do get ahead when someone else pays you interest. Think about it. The money you "borrow from yourself" is 401(k) money and thus pretax money. However, when you make 401(k) loan payments, you are making these loan payments from current pay which is after-tax money. Once your payment is in your 401(k) account, it is again considered pre-tax money, which will be taxed again when you take retirement distributions. So, not only have you lost out on the stock and bond earnings you could have made had you not disturbed your money, you also are being taxed twice on the amount. Think about this as well. If you leave your employer, your plan may require you to repay the loan. If you cannot repay, it will be treated as a taxable distribution - subject to all withholding and penalty taxes. Another option you may wish to consider is a home equity loan. The interest on home equity loans is usually deductible if you borrow under $100,000. Your retirement money continues to earn undisturbed. Some home equity loans may be available at better interest rates. Of course, like your mortgage, your home is the collateral for a home equity loan. This is a risk you must weigh. So, be sure you know all of the advantages and disadvantages of any loan you are considering before you sign on the dotted line.

Q. I keep hearing about the Dow Jones Industrial Average (Dow 30) and the Standard and Poor's 500 (S&P 500) whenever people talk about how the stock market is doing. What are they and do they accurately reflect the stock market?

A. The Dow Jones Industrial Average dates back to 1884, when Charles Dow first began calculating the average stock price of eleven companies. Today, the "Dow" is made up of 30 widely held companies traded on the New York Stock Exchange (NYSE). Although referred to often, the Dow reflects the price movements of only 30 companies. Those 30 companies in the Dow are also very large companies. The S&P 500 is made up of 500 companies chosen by Standard and Poor's to represent a more broad range of companies similar to that of stocks traded on the NYSE. Despite the much larger number of companies in the S&P 500 than the Dow, the S&P 500 still reflects the investment performance of only larger companies. Your retirement funds may be invested in firms too small to be included in either the Dow 30 or the S&P 500. These smaller companies will often have investment performance quite different than the large companies in the Dow 30 and S&P 500. This helps explain why your retirement funds may have returns which are different than the returns of the Dow and S&P 500. The Dow and S&P 500 only tell part of the stock market story, but they are the way America takes the pulse of the stock market.

Q. What is an annuity and how does it pay out?

A. Life insurance companies issue two types of contracts which are really designed to handle "opposite problems":

Life Insurance - This is protection against dying too soon and leaving your family short of money.
Annuity - This is protection against living too long and thus running out of money. "Annuitization" literally means you exchange a sum of money with an insurance company in return for a commitment to pay an income for life. Great if you live to 100; not so good if you die after two months. There is an element of insurance here as those who die early provide the funds for those who die late. Again, this is somewhat the opposite of life insurance, where those who live long provide for those who die early.

There are several payout options generally available:

Life-Only Annuity Option (Straight Life)
  • The annuitant receives benefit checks each month for life
  • When the annuitant dies, benefits end - there is no beneficiary
  • Covers one person
Life Annuity with Period Certain
  • The annuitant selects a minimum period of time for which payments are guaranteed
  • When the annuitant dies, payments continue to the beneficiary for the remainder of the contract time selected
Joint Life with Last Survivor Annuity
  • Covers two people and the contract will pay as long as one of the annuitants is alive
  • Cash or Unit Refund Life Annuity
  • If the annuitant dies before the value of the annuitant's account has been paid out, the account will be cashed in and sent to the beneficiary. Again, we remind you to consult your tax advisor.
Q. What distribution options are available from a 401(k) at retirement?

A. Your plan will allow one, two or all three of the following options:
  • Lump Sum/Rollover
  • Installment Payments (usually monthly)
  • An Annuity (Remember to consult your tax advisor.)


Q. Can my creditors get at my 401(k) account balance? If someone fell on my driveway, could they sue and recover money from my 401(k) plan?

A. No. Based on current law and recent court decisions, the money in your employer sponsored retirement plan is protected. Be it creditors of yourself, your employer or the financial institution handling your employer's plan, your account balance is protected. The only way part of your account balance could be "taken" from you would be in the case of a divorce. In a divorce situation, a court order known as a "Qualified Domestic Relations Order" could result in transfer of part of your account balance to a former spouse.

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