401K Can Help You Avoid Losing Your Home to a Bank Foreclosure
Are you facing the prospect of losing your home in a bank foreclosure? Many who are experiencing a temporary financial squeeze will withdraw cash out of their IRA in order to save their home. Getting a loan from your retirement account may be a smarter way to go than taking an IRA distribution.
As with most people your home and retirement savings probably represent the bulk of your available assets. However, withdrawing money from your retirement accounts, even if it's to protect against a foreclosure, will cause you to lose a big part of your retirement money to taxes. A better strategy is to take money out of your retirement funds by way of a 401k loan. A loan from a 401(k) doesn't trigger any distribution taxes and avoids the 10 percent early withdrawal penalty, as long as you repay the loan.
When you have a job you generally can get a loan from your employer's 401k plan. But once you leave or lose your job, as a rule, you can no longer keep your 401k loan or borrow from the plan.
You may, however, be able to start your own individual 401k plan, called a Solo 401k or Self-employed 401k under new tax laws that became effective in 2002. The paperwork to set up a Self-Employed 401k is easy. You can also transfer any of your IRAs, 401k, SEP plan or other qualified retirement funds to your Self-Employed 401k plan. Most Self-Employed 401k plans allow you to borrow up to 50 percent of your account balance all the way up to $50,000. The 401k loan is tax-free and penalty free.
With a lingering recession, anemic job market, and rising property taxes and fuel bills, experts predict that many more people will default on their mortgage payments and face bank foreclosure action. Small business owners and contract freelancers are especially vulnerable to the economic slump.
The Self-Employed 401k is a qualified retirement plan that can be set up by anyone who has a part-time or full-time business. This retirement plan is similar to 401k plans of large companies. The difference is that the Self-Employed 401k is designed for an individual and as such is less complicated and less costly to maintain. Any person with a business with no employees can set up a Self-Employed 401k plan.
The cost and features of Self-Employed 401k plans will vary depending on the plan vendor. A typical plan will cost less than $200 a year to maintain and allow loans with terms of 5 years or more at an interest rate close to prime rate. The good part is that all of your loan payments including the interest go back to your 401k account. Take caution, however, because not paying your 401k loan on time will trigger IRS tax consequences as if your loan was a taxable distribution.
According to Southern California-based (401k) Enginuity (www.401kenginuity.com), twenty-year veteran in developing and running 401(k) administration and 401(k) software and recordkeeping systems, the Internet will be the primary delivery system for 401(k)s by 2007. Many web-based 401(k) plans will run on administration and recordkeeping platforms that plan providers will outsource to 401k specialists and 401k Application Service Providers (ASP).
The advantages of web-based online 401(k) plans are obvious to today's workers, and include use conveniences, real-time monitoring and reporting, and instant re-allocation of their retirement assets. The internet has also dramatically reduce the cost of 401(k) plan administration, saving plan sponsor 50% or more in ongoing fees and costs when compared to the older traditional labor-intensive plans. Outsourcing of 401(k) functions by plan providers will extend the trend towards lower cost, high-quality 401(k) products.
401(k) plan providers of all types, financial institutions including banks, insurance companies, brokerages, mutual fund companies, credit unions, and third-party administrators, are now actively outsourcing 401(k) administration and recordkeeping tasks to 401(k) ASPs --- vendors such as 401k Enginuity, whose sole function is to maintain, updated and supervise software-based 401(k) administration and recordkeeping systems on behalf of plan providers. 401(k) ASP vendors are responsible for all routine day-to-day 401(k) recordkeeping and administration functions, thus allowing the plan providers to reduce internal staff, eliminate the expense and complications of licensing, housing and running hardware and 401(k) administration software in-house. Plan providers can refocus and concentrate their efforts on to the needs of their plan sponsors and plan participants, and rely upon the outsourced ASP 401(k) vendor for the recordkeeping and technical "backbone" supporting providers' Internet-based plans. It is inevitable that some of this 401(k) outsourcing to ASPs will include secondary outsourcing of certain non-critical low-level routine day-to-day tasks to non-US locations, where labor costs are less yet the expertise is abundant.
Sample 401k Safe Harbor Employee Notice
The below is taken from the master Summary Plan Description for our run-it-yourself 401k plans. If your plan is a safe harbor plan, you should use the version of the below that is contained at the end of your customized SPD as your Notice to Eligible Participants.
SAFE HARBOR PROVISIONS:
Special Notice to Employees Eligible to Participate in Our Company Plan
Our company Plan is a safe harbor 401k plan. Please read on for important information regarding our Plan.
A safe harbor plan is not required to perform nondiscrimination testing of participant elective contributions or of employer matching contributions, but instead has chosen to meet certain employer contribution requirements and provide 100% immediate vesting of the contributions.
You should consider the information in this Notice as well as in this Summary Plan Description in its entirety in deciding the level at which you will participate in our company Plan.
EMPLOYER CONTRIBUTION REQUIREMENTS
To qualify a 401k plan as a safe harbor plan, an employer must make matching contributions that fulfill the below requirements, or the employer must make a nonelective contribution equal to 3% of each eligible employee's compensation.
Nonelective contributions are made to all eligible employees, regardless of whether they participate in the plan or not. Matching contributions, on the other hand, being based upon salary deferral amounts, are made only to active plan participants.
If our company chooses to make safe harbor matching contributions, the contributions must meet two requirements: First, each non-highly compensated employee must receive a dollar-for-dollar match on salary deferrals up to 3% of compensation and a 50¢ to the dollar match on salary deferrals from 3% to 5% of compensation. Second, the rate of any matching contributions being made to highly compensated employees cannot exceed that made to non-highly compensated employees.
OUR PLAN'S SAFE HARBOR DESIGNATIONS
In qualifying its Plan as a safe harbor 401k plan, our company has chosen to... (include the appropriate of the following) make a 3% nonelective contribution to all eligible employees each year.
Make dollar-for-dollar matching contributions to non-highly-compensated employees on salary deferrals up to 3% of compensation and 50¢ to the dollar matching contributions to non-highly compensated employees on salary deferrals of 3% to 5% of compensation, making sure not to exceed these rates in any matching contributions made to highly compensated employees.
Define its contribution rate and type at a later date, in no event later than 30 days before the end of our Plan Year. You will receive a supplemental notice by that time informing you of our company's safe harbor contribution decision. Any safe harbor contribution our company makes will be at least 3% of your compensation, and you will have 100% immediate vesting of those contributions, if any.
Please check with our Plan Administrator if you would like to know your compensation categorization (highly compensated versus non-highly compensated) under our Plan.
The amount of your compensation that the Plan will consider for any safe harbor contributions is the same figure that the Plan uses for other contribution purposes. See Section IV. Contributions to Our Plan, subsection Compensation of this SPD for details.
In defining its safe harbor designation, our company has chosen to make its safe harbor contributions... (include the appropriate of the following)annually/per payroll period/per month/per quarter.
Any safe harbor contributions our company makes will be in addition to any other employer contributions defined in this Summary Plan Description that our company will be making to our Plan.
Any safe harbor contributions allocated to your account will be subject to the same distribution rights and restrictions defined in this Summary Plan Description as other monies allocated to your account EXCEPT that safe harbor contributions are not eligible for hardship withdrawals. See Section V. Benefits Under Our Plan for details.
Any safe harbor contributions made will not affect your ability to make salary deferrals under our Plan, nor will they affect your ability to, at any time, revoke your decision to make salary deferrals. During the 30 days following our company notifying you of its safe harbor designation decisions, you are free to start or alter your deferral election by completing an Enrollment Pac (which includes a Salary Reduction Election section) and returning it to our Plan Administrator. You may otherwise start or alter your deferral election on any January 1st, April 1st, July 1st or October 1st, as defined in Section IV. Contributions to Our Plan.
Our company will notify you at least 30 days (and no more than 90 days) before the start of each new Plan Year regarding its safe harbor contribution decisions, even if those decisions have not changed since the previous Plan Year. Notification may come in the form of an updated Summary Plan Description (this Notice included) or in an updated Notice only.
Please contact our Plan Administrator if you have any questions regarding our company's safe harbor designations - or about any other aspect of our company Plan.
404c Compliance for Your Company Plan
Your Plan Administration Software Helps You Meet ERISA's 404c Requirements
Online Investment Advice Sources
The Employee Retirement Income Security Act (ERISA), along with the Internal Revenue Code, sets the legal framework within which all 401k plans must operate. ERISA aims to prevent asset mishandling by administrators, trustees, and others. All 401k plans must meet the guidelines set forth in ERISA Section 404(c) regarding educating employees about 401k plans and disclosing plan and investment-related information to them.
Your plan administration software includes general and plan-specific disclosure and investment educational materials for your employees. In addition, personal investment advice services are available online. Participants can sign up for these services to help them make educated investment decisions.
Your Plan Administration Software Helps You Meet ERISA's 404c Requirements
- Your plan administration software helps you meet 404(c) requirements in a number of different ways:
- Your plan offers an array of mutual fund investment options and, if your company has so selected, individual participant-directed brokerage accounts.
- Your plan's participants can change their investment choices and/or contribution levels as often as you allow.
- Participants' accounts receive daily asset valuation and monthly statements.
- Participants have 24-hour-a-day, seven-day-a-week access to their personal account information and easy access to prospectuses for all mutual funds offered within the plan.
- Your plan administration software comes with general 401k and investment education materials in both printed and video format for your employees. This includes written materials to be passed out at your enrollment meetings (part of the Investment Decisions Pac) that help employees decide what kind of investors they are and what kinds of funds are best for them. In addition, we supply you with material that introduces your employees to the online retirement guidance and educational services. Participants can individually choose to sign up for services from such industry leaders as mPower and FinancialEngines. Individuals pay for the services themselves, yet your company benefits in meeting the 404(c) compliance by providing the introduction.
- Your plan administration software comes with plan-specific disclosure materials for your employees.
- Your plan administration software automatically prepares and updates account statements for each participant every month (and prepares mailing labels, making distribution of the statements a breeze).
- Using your plan administration software you can permanently log all employees' requests for information.
And the Quick Guide and this Supplement tell you what information to distribute , when, and to whom.
Online Investment Advice Sources
Many credible sources are available that deliver fast, timely, professional online 401k investment advice to 401k participants. Most allow for either the employer or the individual employees to pay for the service; however, when the participants pay for the services themselves, they have the freedom to choose the service best suited to their individual needs.
Additional non-profit websites that include relevant unbiased information about 401k plans include: www.cpa-401k.com
Details about specific retirement and investment advice services can be found on our website.