Talk:401(k)

See Talk:Retirement plan Chris 02:54, 30 Sep 2004 (UTC)

History

Does anyone have information about the origination of the 401K as a Congressional "favor" for Xerox? This was mentioned in the new Frontline episode regarding retirements. The gist is that the 401k was not intended for the general public, but was a favor for some executives at Xerox as a way of avoiding taxes. Here's the Frontline link (you can watch it online) http://www.pbs.org/wgbh/pages/frontline/retirement/ - Sublium 18:29, 20 May 2006 (UTC)

Anon, you didn't just add a source, you removed the other one. I've never heard of EBRI and multiple sources support the Benna story. Now they may have all been parroting from the same story, and EBRI may be reputable and in the right, but I'm not convinced. I'll try and get a copy of the 1978 Revenue act itself and look at the language. EBRI makes it sound like the act's intentions were a lot clearer than other sources do. Please see what you can find supporting EBRI's version and respond here, and sign your comments with four tildes as in ~~~~. That makes it clear what comments were from who. Thanks - Taxman 03:47, May 4, 2005 (UTC)

I'm no expert, and in fact I reviewed this page to learn about a 401(k) (great article). But I'm suspicious that the hardship withdrawal information isn't correct. My understanding is that you can generally always take out your money from a 401(k) with a 10% fee, regardless of any hardship. If you show hardship, the 10% fee isn't assessed. The article makes it sound like you have to show hardship to be able to take money out at all, and you still might get the 10% fee assessed. Doesn't seem right, I may be wrong. --Rmalloy 19:54, 16 August 2005 (UTC)

Here's another source the details the hardship rules. It probably has some things that should be added to the article, but our article is correct. All hardship withdrawals are subject to the 10% penalty unless they qualify under an exemption as detailed in the article. What that linked article calls the "other type" of hardship withdrawal is not really a hardship withdrawal at all except for the one about debt for medical expenses. The others are all separation from service and disability which is essentially equivalent to a separation. Their third one is not a hardship withdrawal, but a QDRO or EDRO for divorce. That's just standard splitting of an account. Also, withdrawals do require a hardship to get, or a loan can be taken instead if the plan allows. Now not everybody knows or follows the rules perfectly, so an administrator or employer may allow withdrawals that don't fit into the hardship rules, but it's basically illegal, and tax is due on it. But it comes down to who is going to catch it in some cases, and like anything else illegal can be gotten away with. The trustee or plan admin is essentially liable if they were to not follow the rules correctly. - Taxman ^Talk 20:38, August 16, 2005 (UTC)

Thank you so much, that's interesting. I was thinking about putting my money in 401(k) for medium term (e.g. 10-year investments). Given an income tax rate of 30%, you only need above about a 3% ROI to make a 401(k) a better 10-year investment than a post-tax mutual fund. The tax exemption on interest outweighs the 10% early-withdrawal penalty. But now this plan seems risky :(. --rmalloy 21:06, 16 August 2005 (UTC)

Well keep in mind, the 401(k) is only tax deferred. All money withdrawn (a loan is not a withdrawal, you have to pay it back or else it is taxed as a withdrawal) from it is taxable income in the year withdrawn. I suppose I should make that more obvious in the article. - Taxman ^Talk 21:34, August 16, 2005 (UTC)

The article already mentions why it makes a huge difference. With the 401(k), the interest compounds without being taxed annually. It's only taxed on the back end. If P is the principal, T is the tax rate, and I is the interest rate (assume T and I constant), then after ten years you have the following. 401(k): 0.90*T*P*(1+I)^10. Regular investment: T*P*(1+I(1-T))^10. Given a reasonably high I and T, you come out substantially better with the 401(k). I think the article is totally correct right now, and very well-done. --Rmalloy 22:09, 16 August 2005 (UTC)

Well perhaps, but that should probably be 1-T everywhere, and the one for regular investments improperly both applies the initial 1-T to the whole amount and assumes all of the return is taxable income each year. It's more likely to be one or the other, or a mix. One one extreme, if all of the income is taxable each year, that adds to the basis, so there would be no initial (1-T) for the overall taxation. One the other, if all of the return is capital gain, with no taxable income each year, the second 1-T disappears. So having them both at the full tax rate (capital gains tax is lower than most of the income tax rates) overestimates the taxation. That means except in the extremes you can't make a simple formula like you are looking for for the regular investment, but you could spreadsheet it and/or run a stochastic simulation. I probably should have skipped all this, since even though it is interesting, we're well beyond the bounds of this particular article, and probably any that should be on Wikipedia. In any case, glad you found it a good article. I should probably more explicitly state my references though. - Taxman ^Talk 23:16, August 16, 2005 (UTC)

I'm fairly sure one part of that is inacurate. I work in the industry and I beleave that in a 401(k) plan the early withdrawal penaulty is still assesed under a hardship distribution. I think this common misconception comes from the fact that in an IRA these circumstances would make you exempt from the 10% tax. I'll see if I can find a source. It might be worth noting that the last two hardship were added in 2006, and it's very common for employers to use only the first four (as they've not chosen to update the plan document).

Also, I think the 402(g) contribution limit is going up $1000 a year, rather than $500, as is the catch-up contribution limit. This has historically been the case, but it might be changed for 2007. I'll try to find a source on this also. Rafngard169.200.225.34 14:20, 21 April 2006 (UTC)

Governmental 401(k)'s

The 1986 date for when governmental plans had to be established by doesn't seem right to me, but I can't find the date definitively anywhere now. I seem to remember a cutoff more like 1994. Anyone know a way to find that? - Taxman ^Talk 18:26, 17 February 2006 (UTC)

Repeated text?

Tax benefits and considerations contains a section about the 10% penalty on premature withdrawl from a 401(k) twice (or so it seems to me). Is this a mistake or am I missing something? --Plamoni 20:08, 14 March 2006 (UTC)

Not really, 10% is metioned twice. Once for hardship withdrawals and again for withdrawals for people under the age of 59 1/2. Hardships are a type of withdrawal so both are subject to the 10% penalty.

401k crash of 2001

I lost a lot of money in my 401k during the stock market plunge in 2000-2001. I suspect a lot of other people did too. Any facts/stats on that? I am wary about re-investing. There are some who consider that the mass selling of the 401k to the rank and file was a class conspiracy to redirect more wealth to the top. Numbers? ---Ransom (68.121.52.29 20:00, 18 March 2006 (UTC))

Is "401K" an acceptable spelling?

I've noticed that while the article mostly uses "401(k)" with parentheses around the 'k', there are a few times where it is spelled "401K" or "401k" without parentheses. I was about to correct them, but I'm not 100% sure. Is 401K an acceptable alternate spelling?