5 Questions Commonly Asked by 401(k) Participants

By Jeffery Levine, IRA Technical Expert  

Follow Me on Twitter: @IRAGuru4EdSlott

On Monday, we will be celebrating Labor Day, a holiday established to pay tribute to the American workforce. Much of that workforce has access to some type of employer plan and, for more than 50 million workers, that plan is a 401(k) plan. So, with that in mind and in honor of Labor Day, this week we take a look at 5 answers to questions commonly asked by 401(k) participants.

1. I am currently working and contributing to my company’s 401(k). I would also like to contribute to an IRA. Can I do that?

Absolutely! Participating in your employer’s retirement plan never prevents you from being able to make an IRA contribution. That said, depending on your total income, your contribution may not be deductible. If neither you, nor your spouse, were covered by a company plan last year, any IRA contributions you made for 2013 would be deductible. That’s true whether you made $15,000 or $15 million. If, however, either you or your spouse were covered by a company plan last year, your IRA deduction could be reduced or eliminated depending on your overall income.

2) I have two totally separate jobs that both have 401(k) plans. Can I contribute to both of them?

Yes, you can contribute to both of them. You can strategically allocate your deferrals to get the most out of any company matches that you might be eligible for but, that said, your total salary deferrals to both plans can be no more than the $17,500 limit. If you’re 50 or older by the end of the year, then you can defer a total of $23,00
0 between the two plans. While your salary deferral limit is coordinated between the two plans, if the two employers are unrelated and unaffiliated, you can still receive up to $52,000 in each plan (including company matches and profit sharing components).

3) I am still working and contributing to my employer’s 401(k) plan, but I’d like to roll over my existing balance to an IRA. Can I?

This is a difficult question to answer, because it depends on a number of factors, including your age, the type of money (i.e., salary deferrals, company match) you’re trying to rollover and your plan’s specific rules. That said, if you’re under age 59 ½, and still working, it’s unlikely that you’ll have access to much, if any, of your plan assets to execute a rollover. If, on the other hand, you’re over 59 ½ and still working, it’s generally going to be up to the specific rules in your employer plan as to how much, if any, of your funds you have access to.

4) I want to put money into a Roth account, but my current employer’s 401(k) doesn’t seem to have that option. What can I do?

The law allows an employer with a 401(k) to offer a Roth option within the plan, but there is no law requiring them to do so. If you would like to have this option, it’s worth asking your employer if they’ll consider amending the plan to add it. In absence of that, you can make a contribution to a Roth IRA, assuming you’re eligible to do so. For more on that, you can check out this page.

5) My spouse is the beneficiary of my 401(k), but I want it to go to my children. How can I do that?

Under a federal law known as ERISA (which, coincidentally, was signed into law on Labor Day 40 years ago in 1974 by then new President Gerald Ford), your spouse is typically the automatic beneficiary of your 401(k), even if you did not name them as the beneficiary on your beneficiary form. If you want to name someone else, it’s a two-part process. First, you must get your spouse to sign a waiver, acknowledging that they are releasing their rights to your 401(k) assets. Use a professional for this to make sure it is executed correctly. Next, you need to fill out new beneficiary forms that name your alternate beneficiaries. Without completing both of these steps, you’re unlikely to achieve your desired outcome.