Retirement Savings Quiz

How is a Roth 401(k) different from a regular 401(k)?
a. Your contributions are made on an after-tax basis.
b. There are tougher restrictions on withdrawals.
c. You cannot take a loan from a Roth 401(k).
d. There is no difference between the two.
Answer: (a) Your contributions are made on an after-tax basis.
Explanation:There are differences between a Roth 401(k) and a regular 401(k)—primarily that Roth contributions are made after taxes have been withheld from your paycheck, and the earnings on those contributions can be distributed without penalty or tax if they are held for a certain period of time. However, the withdrawal restrictions are identical to a regular 401(k), and nothing stops your employer from allowing you to borrow money against that Roth 401(k) account.
 
Thanks to the Pension Protection Act:
a. 401(k) plans must offer automatic enrollment.
b. The Roth 401(k) will expire in 2010.
c. Non-spouse beneficiaries (children, parents, domestic partners, other family members, and friends) who have inherited assets from employer-sponsored retirement plans like 401(k)s may roll them over directly to inherited IRAs.
d. You can no longer make "catch-up" contributions.
Answer: (c) Non-spouse beneficiaries (children, parents, domestic partners, other family members, and friends) who have inherited assets from employer-sponsored retirement plans like 401(k)s may roll them over directly to inherited IRAs.
Explanation: The Pension Protection Act removed the 2010 expiration date for the Roth 401(k), and it also made "permanent" the ability to make catch-up contributions. The PPA provides some extra encouragement for employers to offer automatic enrollment as a plan feature, but does not mandate it.
 
Lifecyle or Target-Date Funds:
a. Require you to set a new investment strategy each year.
b. Are automatically rebalanced on a regular basis by investment professionals.
c. Are generally free.
d. Are best used when selecting at least three different target-date funds.
Answer: (b) Are automatically rebalanced on a regular basis by investment professionals.
Explanation:A target-date fund, properly used, is supposed to make it easy for you to make good investment decisions by allowing you to pick a single fund—a fund that is automatically rebalanced on a regular basis by investment professionals. The fund is built with a specific future date in mind, so you do not need to set a new strategy each year. As for cost, there's no such thing as a free lunch—or a free target-date fund.
 
When you are considering taking a distribution from your 401(k), don't worry:
a. Distributions from your 401(k) are tax-free.
b. You have 120 days to make a rollover decision.
c. Your new employer has to accept the rollover from the old plan.
d. You have a variety of options—but you'll want to consider them carefully.
Answer: (d) You have a variety of options—but you'll want to consider them carefully.
Explanation: Distributions from your 401(k) are not tax-free, except for any after-tax or Roth 401(k) contributions (and earnings on the latter, if they qualify) you may have made, and your new employer does not have to accept the rollover (though it may). At most, you have 60 days from the day you take the distribution to make a rollover decision. Even then, if you do not roll over the distribution directly to another employer plan or IRA, 20% of your distribution will be withheld for taxes (you'll have to file for a refund to get it back).
 
What's the most important savings decision?
a. Picking the right investment fund(s).
b. Deciding to save in the first place.
c. Choosing between a Roth 401(k) and a regular 401(k).
d. Paying attention to the amount of fees charged by the individual mutual funds.
Answer: (b) Deciding to save in the first place.
Explanation: All of the above are important, but the most important is the decision to save in the first place. The other decisions will have an impact, but not nearly as much as the decision to save as much as you can as early as you can.
 

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