THE INS AND OUTS OF 401(K) PLANS

There's no denying it ... for many employees, their 401(k) plans will be their single biggest asset in retirement. And, unlike traditional pension plans that are funded by employers, the fate of 401(k) plans is in employees' hands since they control the amount that is invested and how it is invested, points out the Georgia Society of CPAs. That's why it's important to have a thorough understanding of the "ins" and "outs" of 401(k) plans.

HOW DOES A 401 (K) PLAN WORK?

You invest in a 401(k) by agreeing to have a percentage of your salary set aside every year for retirement. The amount you deposit is tax-deferred, which means it is not included in your taxable wages for that year. As an added benefit, you investment and the interest, dividends, and capital gains it earns accumulate on a tax-deferred basis.

HOW DO I CONTRIBUTE?

The amount you choose to contribute is taken directly from your wages. This savings feature is especially attractive for those who find it difficult to save on their own.

HOW MUCH CAN I CONTRIBUTE TO MY PLAN?

The amount you can contribute is set by your employer as a percentage of your salary up to an annual legal maximum ($10,000 for 1998) that rises each year with inflation.

Typically, you can set aside as much as 15 percent of your salary up to the annual maximum. Many employers who offer 401(k) plans will match all or part of employee contributions. You might get $.50 or $1.00 for every pre-tax dollar you contribute, up to a certain percentage of pay. Some companies allow you to contribute an additional amount of after-tax dollars to your plan. This amount is not deductible, but your after-tax contributions grow tax-deferred.

HOW DO I INVEST MY MONEY?

Most plans allow you to pick from a number of investment vehicles chosen by the company. Among the options, you're likely to find stock mutual funds, bond funds, guaranteed-investment contracts, money-market mutual funds, and company stock. Most 401(k) plans allow you to switch from one investment to another. When and how often you can make changes depends on the rules of the plan. Most plans allow you to change quarterly, but with technology making it easier to process transfers, some even permit monthly or daily changes. By law, your employer is required to give you a written status report on your account each year if you request one. Many companies allow you to check your plan's current value and performance by calling an 800 number or using the Web.

WHAT IF I LEAVE MY JOB?

If you change jobs or are laid off, you are entitled to every dollar you contributed to your 401(k) plus all the income your plan earned. If the company you work for matched your contributions, the amount you get depends on the plan. Some companies turn everything over to you regardless of how long you worked; others require you to work a certain number of years before you are fully vested. In all cases, however, by law you must be fully vested after seven years. To avoid subjecting your retirement savings to immediate taxation and a 10-percent penalty for early withdrawal, you have three options when you leave your job: (1) you can leave the money in your old company's plan if your account is worth more than $5,000; (2) you can roll your balance into a traditional Individual Retirement Account; or (3) you may move the money into your new employer's plan, as long as the company accepts rollovers.

CAN I TAKE MONEY OUT OF MY 401(K) PLAN WHILE I'M STILL WORKING?

If you're under age 59, most plans allow withdrawals only if you can prove extreme financial hardship. A better option is to borrow from your 401(k). Most plans permit you to borrow as much as one-half the value of your 401(k) up to a maximum of $50,000. The interest rate you pay is generally one or two points over prime. Most loans have to be repaid within five years, although your employer may allow a longer repayment period (up to 30 years) if you use the money you borrow to buy a principal residence. Repayments are usually made by payroll deduction.

WHEN CAN I BEGIN WITHDRAWING MONEY FROM MY 401(K)?

You may begin making penalty-free withdrawals from your 401(k) at age 59 (age 55 if you took early retirement). Once you reach age 70, you must begin to take money out of your plan. The minimum you must withdraw is based on the amount you have invested and your life expectancy or the life-expectancy of you and your beneficiary as determined by IRS tables.

Once you reach retirement age, don't withdraw funds haphazardly. CPAs point out that just as investing in 401(k)s requires a clear strategy, so too does withdrawing funds .

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