The 401(k) Retirement Plan For Physical Therapists And Occupational Therapists

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Many physical therapists and occupational therapists who work for an employer are provided access to a 401(k) retirement plan. 

If this is you, be sure to read this article – it will teach you the ins and outs of. . .

  • What is a 401(k)?
  • Who is eligible for a 401(k)?
  • How do I open a 401(k) account?
  • What’s the difference between a Traditional and Roth 401(k)?
  • How much can be contributed to a 401(k)?
  • Is the money in my 401(k) mine?
  • When can I make withdrawals from my 401(k)?
  • And so much more. . .

Ready to learn about your 401(k)?

Let’s get started.

What Is A 401(k) Plan?

401(k) is a type of retirement plan employers in the private sector (not a government entity) often offer to their employees. 

Named after its own tax code, the 401(k) allows employees to defer receiving part of their salary so that this money can instead be deposited into their 401(k) account. That money can then be invested to hopefully grow until you are ready to retire.

In addition to funding your own 401(k) account, some employers will also make their own contributions by agreeing to match part of how much you contribute.

And since the 401(k) is a qualified retirement plan, it can provide you with special tax benefits too.

Who Is Eligible For A 401(k)?

You can get access to an employer-sponsored 401(k) by working for an employer who offers a 401(k). Qualifying employers are typically in the private sector, meaning they are not government entities. 

Instead, if you work for a government entity, you will probably be offered access to one of or both of a 403(b) or 457(b) retirement plan instead of a 401(k).

While you can also open a type of 401(k) commonly referred to as an individual or solo 401(k) if you are self-employed, the focus of this article will remain on the employer-sponsored 401(k). 

The IRS stipulates that your employer must allow you to have access to their employer-sponsored 401(k) if you are at least 21 years old and have worked for them for at least 1 year. If you don’t meet these requirements, your employer has the right to restrict you from getting access to their 401(k) until you do meet them.

How Do I Open A 401(k)?

If your employer offers a 401(k) and you either meet the age and length of service requirements described above in “Who Is Eligible For A 401(k)?” or your employer waives them, then you can open a 401(k) account.

More and more employers are now automatically enrolling their employees in a 401(k), but some still instead provide you with information on how to set up your account. If you need information from your employer to do this, talking to either Human Resources or the payroll department can be a good place to start.

Beginning on January 1st, 2025 the Secure 2.0 Act of 2022 will require employers to automatically enroll their employees in a 401(k) and employees will begin making automated contributions starting at 3%. This contribution percentage will then be automatically increased by 1% each year until it reaches 10%.

How Do I Contribute To A 401(k)?

Contributions to an employee’s 401(k) can be made by both the employee and the employer.

Employee Contribution

Employee contributions are made as a salary deferral. 

More specifically, you will first decide how much you would like to contribute to your 401(k). This can either be a specific dollar amount or a percentage of your paycheck. This amount will then be taken from your paycheck each pay period and deposited into your 401(k) account. 

Employer Contribution

Sometimes an employer will offer to match an employee’s contribution up to a certain amount.

For example, an employer might match your 401(k) contribution dollar-for-dollar up to 3% of your 401(k) employee contribution amount.

Or an employer might just make a contribution that is 3% of your salary.

In either case, when the employer makes the contribution to your 401(k) it is referred to as the employer contribution.

What’s The Difference Between The Traditional 401(k) And The Roth 401(k)?

The 401(k) offers some great tax benefits. 

Depending on the type of 401(k) plan you choose, these tax benefits can vary so it is important to know the difference between these two options.  

1. Traditional 401(k)

The traditional 401(k) is the most common 401(k) option you will come across. 

It allows an employee to avoid paying taxes when making contributions to a 401(k) account. 

While the money remains in your 401(k) account, you can buy and sell investments without having to pay taxes. 

Of course, you can’t avoid paying taxes forever. When the time comes to make withdrawals, you will need to pay tax on the amount you take out. The amount of tax you will need to pay will depend on your tax rate when making the withdrawal.

2. Roth 401(k)

Unfortunately, not all employers offer a Roth 401(k) option. But if you do have it as an option, it is important to understand how it works.

Unlike the traditional 401(k), with a Roth 401(k) you pay taxes on your contributions before that money is deposited into your Roth 401(k) account.

Just like the traditional 401(k), you can buy and sell investments without having to pay taxes. 

Then, when you make a withdrawal you won’t owe any taxes since you had already paid taxes on the contributions you initially made.

It’s important to know that employer contributions cannot be made as Roth contributions – only traditional 401(k) contributions. Therefore, even if you have a Roth 401(k) option, you can only make employee contributions to it and all employer contributions will need to be made as traditional 401(k) contributions.

How Much Can Be Contributed To A 401(k)?

As mentioned earlier, both employee contributions and employer contributions can be made to your 401(k). 

But the IRS sets a limit on how much of each can be made and this limit can change each year as the federal government typically increases it to keep up with inflation.

Employee Contribution

In 2023, the maximum amount that can be made as an employee contribution to your 401(k) account is $22,500.

Employer Contribution

In 2023, the total amount (employee + employer contributions) that can be contributed to your 401(k) is $66,000.

That means your employer can contribute as much as $43,500 ($66,000 – $22,500) to your 401(k) account. You should be very surprised if your employer contributed anywhere near that amount, though, as that is not very common.

Can More Be Contributed To A 401(k) If I Didn’t Contribute Very Much Early On?

Yes. 

If you are more than 50 years old, you can make what is called a “catch-up contribution.” 

This term is used to describe someone that is closer to retirement age but looking to stash away more money into their 401(k) to make up for not having contributed enough earlier on. But no matter where you stand financially, if you are over 50 years in age, you can take advantage of the catch-up contribution opportunity.

In 2023, the IRS allows an employee can make a catch-up contribution of as much as $7,500.

401k Contribution Limits For Year 2023

Since this contribution is being made by you, the employee, it is considered part of the employee contribution. Therefore, if you are eligible to make a catch-up contribution, you can make a total employee contribution of $30,000 ($22,500 + $7,500) in 2023.

Do All 401(k)s Have The Same Investment Options And Fees?

No.

While your employer sponsors the 401(k) so you can get access to having an account, a vendor (eg Vanguard, Fidelity, Schwab, etc) must be used to actually set up the account and provide you with investment options.

Each vendor provides different investment options at varying fee amounts. These most commonly include mutual funds but can also include index funds, bond funds, and possibly other options as well.

Your employer will typically only provide you with one vendor option, so it doesn’t matter if you like or don’t like that option, you are stuck with them.

Be sure to understand the fee structure of your investment options before deciding how to invest your 401(k) balance. 

Is The Money In My 401(k) Mine?

Yes and no. 

The IRS stipulates that it depends on how the money was contributed to your 401(k).

1. Employee Contribution

The money you contributed to your own 401(k) account is yours. This is called immediate vesting, where you do not need to wait any amount of time to pass before this money becomes yours.

It’s your immediately after contributing it to your 401(k) and so are the earnings you made by investing that money.

2. Employer Contribution

The money your employer contributes to your 401(k) is only yours after you have vested.

This could happen immediately, just like your employee contributions, or gradually over time as you continue to stay at your job longer. It depends on the vesting schedule your employer is using. 

Be sure to ask your employer for a vesting schedule so you have a better idea of where you stand.

Can I Take Out A Loan On My 401(k)?

It depends on your vendor.

While the IRS states that you may take out a loan on your 401(k) balance, the vendor your employer uses for your 401(k) must allow the ability to take out a loan as an option. 

If they don’t, then you can’t take out a loan.

If they do, then you can take out a loan but you must do so following IRS guidelines.  

For example, your loan amount in a single calendar year cannot exceed the lesser of either $50,000 or 50% of your vested 401(k) balance.  

You must also pay make quarterly payments to pay the loan back in no more than 5 years or before your leave your job, whichever occurs sooner. The exception to this rule is if you use the loan to purchase your primary residence. 

Otherwise, if you don’t, you’ll be hit with having to also pay a 10% penalty on the amount you took out as well as income taxes on that amount.

Are There Any Rules For Withdrawing Money From A 401(k)?

Yes.

Withdrawing money from your account is also referred to ask taking a distribution.

Taking A Standard Distribution

The IRS stipulates that you can be stuck paying income taxes and a 10% penalty if you take a distribution from your 401(k) before becoming 59 ½ years old.

This applies no matter if you continue working or no longer work anymore.

However, the Rule of 55 offers a special opportunity if you decide to leave your job.

The Rule Of 55

If you decide to leave your job when you are at least 55 years old, then you can start taking distributions without being hit with the 10% penalty.

This opportunity is not an option, though, if you leave your job before turning 55 years old.

What If I Leave My Job?

The IRS provides you with several options on how to manage your 401(k) account balance if you leave your job.

Option #1: Leave Your Account Balance Alone

Just because you leave your job doesn’t mean you have to move the money in your 401(k) to a new location.

You can opt to just let that money stay right where it is.

This can be an option especially worth considering if you like you’re the investment options the vendor at your previous job offers.

Option #2: Cash Out Your Account Balance

You do have the option of cashing out the balance of your previous employer’s 401(k) account.

However, this may not be a great option since you can find yourself stuck paying a hefty amount in taxes, possibly also a penalty, and miss out on the long-term investment and tax benefits of having a 401(k). 

The exception, though, is The Rule of 55 described earlier which can allow you to avoid being hit with the 10% penalty.

Option #3: Rollover Your Account Balance

If you are leaving your job to accept a new job and your new employer offers a 401(k), then you can simply rollover the balance from your previous employer’s 401(k) account to your new employer’s 401(k) account.

This can be an option especially worth considering if you like the investment options the vendor at your new job offers better than the investment options offered by the previous vendor.

When rolling over money from one 401(k) account to another 401(k) account, you are transferring one account’s balance to another account. This allows you to avoid paying taxes on the amount being rolled over. 

On the contrary, if you withdrew the money from one account to then deposit it into another account, you would then owe taxes on the amount withdrawn.

Option #4: Rollover Your Account Balance

You also have the option to rollover your 401(k) balance to a traditional IRA or a Roth IRA. 

If you are planning on performing a Backdoor Roth IRA, this may not be the best option for you. 

But if you are already retired, this may be an option worth considering since an IRA can allow you to have many more investment options compared to only having access to the investment options offered by your employer’s vendor.

Final Thoughts. . .

The 401(k) can be a great way to save and invest for your eventual retirement.

It has a high contribution limit, allowing employees to deposit as much as $22,500 in year 2023. 

However, while employers can contribute as much as $43,500 in year 2023, few will actually make contributions anywhere near that amount. That said, it is common to get an employer contribution in the form of a match.

The employee contribution you make are also immediately vested and so are the earnings you make from investing that money. However, the employer contributions may not vest immediately. Be sure to ask your employer for a vesting schedule to know where you stand.

You’re also stuck with investing options the one vendor your employer decides to offer you. If this is a vendor you like, this can be great. If not, oh well.

And while you can’t with withdrawals without incurring a penalty until you are at least 59 ½ years old, the Rule of 55 offers an exception to this rule where if you leave your job when you are at least 55 years old then you can start making withdrawals from your 401(k) without getting hit with that penalty.

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