retirement

5 keys to automatic retirement plans

Salary deferral may increase automatically

Some automatic enrollment plans have step-up provisions that regularly increase deferral percentages, with the goal of helping employees increase their retirement savings over time, says Sulzer.

These salary-deferral increases usually occur around the same time an employee receives a cost-of-living raise, says Karp. Under most arrangements, the savings rate cannot exceed 10 percent of compensation in any year.

If your company is putting a freeze on raises this year, ask if your 401(k) plan will freeze automatic percentage increases, too. Otherwise, you could be deferring a bigger chunk of your paycheck into your 401(k) if the deferral percentage automatically increases.

Any time a major change is made to a plan, the employee should be notified.

Penalty-free plan withdrawals sometimes allowed

Some employees may start a job without realizing that a portion of their income will be placed in an automatic 401(k). If you discover such deferrals after the fact, you may still be able to halt future contributions and have any previous salary deferrals "refunded" back to you, says Sulzer.

Generally, this withdrawal election must be made within 90 days after the date of the first automatic contribution. Not everyone has the right to this type of refund, though.

"An employer is not required to include the withdrawal provision in the plan," Sulzer says.

Other employers may offer a shorter time frame -- such as 30 days -- to make the withdrawal election.

Employees who elect to withdraw their money will owe income tax on the withdrawn amount, but they won't receive the 10 percent penalty otherwise associated with early 401(k) withdrawals.

Most normal 401(k) rules apply

Contributions made to an automatic enrollment 401(k) generally follow the same rules as those of regular 401(k) contributions. These rules include:
  • Early withdrawal penalties. In most cases, any withdrawal a participant makes before age 59½ is considered a distribution, which is subject to income tax as well as an additional 10 percent penalty tax. There are exceptions for a hardship withdrawal, but for most savers, the money needs to stay in the retirement account.
  • Annual deferral and contribution limits. Depending on age and income, there's a maximum amount of money that can be contributed to a 401(k). The general contribution limits for 2009 are $16,500 ($22,000 if you're age 50 or older), although exceptions apply in some cases.
  • Vesting. Employees cannot be required to forfeit any money they've saved through their own salary deferrals. However, employer contributions are usually vested according to the plan's vesting schedule.
  • Eligibility for the saver's credit. This incentive, officially known as the Retirement Savings Contributions Credit, offers a credit between 10 percent and 50 percent of the amount put into a qualified retirement plan, subject to income limits.

To qualify for the credit, adjusted gross income, or AGI, for 2009 must not be higher than $53,000 if married filing jointly, $39,750 if filing as head of household and $26,500 if single.

For more information on these and other 401(k) rules, visit the IRS Web site for details.

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