newjerseynewsroom.com

BY ROBERT J. DIQUOLLO

Many employees take their 401(k)s for granted. They get the paperwork, choose some investments, and hand in their selections to Human Resources without looking at the fine print. By not reading your plan carefully, could you be missing out on "free money"?

If you contribute too little to your 401(k), you may not get the full employer match. On the other hand, if you contribute too much, too fast, you can shortchange yourself.

Take an executive making $20,000 a month who contributes 20 percent to his or her 401(k), with a 5% company match. He or she will reach the IRS's annual contribution limit of $16,500 in May and can't contribute the rest of 2011. If your company only matches based upon your own contributions, you may limit your match. In the example above, the executive receives a company match of only $4,500, if the executive frontloads his or her contributions. If the executive had chosen a 7% contribution rate instead, he or she would not have reached the $16,500 until December and would have received the full company match of $12,000 — $7,500 more — just by knowing the rules.

Penalty-free withdrawals

If you remove money from your 401(k) or 403(b) plan (for nonprofit employees) before age 59½, you normally have to pay a 10% tax penalty in addition to ordinary income tax on the distribution.

There are exceptions to the 10% penalty rule. If you leave or lose your job, you can withdraw money penalty-free from your plan starting at 55. That can be valuable for people taking early retirement or who are long-term unemployed.

Required minimum distributions not always required

If you're retired and have 401(k) or 403(b) plans with your previous employers, you must take required minimum distributions (RMDs) annually from each plan starting at age 70½. Exception: if you're still working for the company, RMDs are generally not required from that employer's plan.

That's an advantage over an IRA. With IRAs, RMDs are always required beginning at 70½.

Changing jobs

Consider moving your assets to a rollover IRA, in the interim, if you are changing jobs and planning to roll over your 401(k) or 403(b) to the new job. Don't make any new contributions to the rollover IRA or commingle it with other retirement money, as you won't be able to transfer it to your new employer's plan.

If you have one or more 401(k) or 403(b) plans with former employer(s), consider rolling all of the accounts into a single IRA or plan so you can more effectively manage your money.

Having all your money in one place makes it easier to monitor your investments and rebalance your asset allocation regularly.

Robert J. DiQuollo, CFP®, CPA, is founder, president and senior financial advisor of Brinton Eaton, a wealth advisory firm in Madison, NJ. He specializes in financial planning, tax planning, and investment management.

ALSO BY ROBERT J. DIQUOLLO

What to expect by inaction on Bush tax cuts