What is a 401(k) plan?
A 401(k) plan is an employer-sponsored qualified retirement program that allows you to save for your retirement by contributing to an account in your employer's plan on a tax-deferred basis. The term "401(k)" refers to the section of the Internal Revenue Code (IRC) that allows participants to make pretax salary deferral contributions into a qualified retirement plan that offers special tax advantages to participants.

How does a 401(k) plan work?In general, subject to your plan's rules and IRC annual maximums, you decide how much money you want deducted from your paycheck each pay period. The IRC maximum is $15,500 for 2007 and 2008. Also, if you are age 50 or older by December 31st you can make additional catch-up contributions of up to $5,000 for 2007 and 2008. The amounts you contribute to your 401(k) account are deducted from your paycheck before federal taxes, as well as most state income taxes, are calculated. That means that by contributing to a 401(k), you can actually lower the amount you pay in taxes each pay period. For example, if your gross earnings are $1,500 each pay period and you defer 6% ($90), you will be taxed on only $1,410. You will not pay federal or state taxes on this money (or any related earnings on your investments) until you make withdrawals from your plan account. At that time, you may be in a lower tax bracket. Your Social Security taxes, however, will be the same as if you did not participate in the plan. This means that participating in a 401(k) plan will not reduce your Social Security benefits. Some plans also allow participants to make after-tax contributions. You decide how to invest the money you contribute, selecting appropriate investment options from a menu of investments your plan offers. By investing a set amount regularly, you can take advantage of dollar-cost averaging as you save toward retirement.

What is dollar-cost averaging?Dollar-cost averaging involves investing a set amount of money in a mutual fund or security at regular intervals, regardless of price fluctuations. This investment strategy can help you buy more shares when prices are lower and fewer shares when prices are higher, which can provide a more beneficial average share cost and alleviate some of the impact of market fluctuations. This strategy neither ensures a profit nor protects against losses in declining markets. Before you invest, you should consider your ability to continue investing in down markets.

May I contribute to both an IRA and a 401(k) plan?
Yes. However, if you are covered by a qualified retirement plan, such as a 401(k) plan, and if your 2008 modified adjusted gross income is above $63,000 on an individual return or $105,000 on a joint return, you cannot take a tax deduction for your IRA contribution. If your modified adjusted gross income is less than these amounts, your IRA contribution may be fully or partially deductible. In either case, contributions and earnings in an IRA compound tax deferred until you take distributions, which must begin no later than April 1 in the year following your attaining age 70½.

When can I join my employer's 401(k) plan?
You may join your employer's 401(k) plan when you satisfy the plan's eligibility requirements. Under the IRC, typically you become eligible at or after age 21 and after you have completed one year of employment, though your employer may adopt more liberal rules.

When can I change or stop my 401(k) contributions?
All 401(k) plans permit you to stop contributions at anytime. Changing your contribution rate is allowed, but the plan may limit the number of changes to monthly, quarterly or annually. (The effective date of any change is based on the plan's specific rules.)

Who decides what investments I can choose in my 401(k) plan account?
Typically the employer or plan sponsor selects a number of investment options, with differing investment objectives, to fit varied participant needs. In general, you are then permitted to allocate your contributions among the choices.

How do I choose the fund(s) most appropriate for me?
Your choices (and your investment objectives) should be based on factors such as your age, your income and your tolerance for risk.

What record will I have of my investments?
Most plans send periodic statements, frequently after the close of each calendar quarter. These statements are likely to summarize your beginning balance or market value, any contributions you and/or your employer have made to your account during the statement period, any fund transfer activity, any loan or withdrawal activity (if applicable), any investment gains or losses and the closing balance or market value..

Can I change the investment direction of my future contributions or transfer my existing balances among the various investment funds?
In general, yes, according to the rules established for your plan.

Can I withdraw money from my account to cover financial emergencies?
It depends on the provisions of your employer's plan. Some plans permit "hardship withdrawals" when participants have "immediate and heavy financial needs" that they cannot cover with other resources. The Internal Revenue Service (IRS) considers the following grounds for hardship withdrawals:

• Un-reimbursed medical expenses for you, your spouse, or dependents.
• Purchase of a principal residence.
• Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
• Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
• Expenses for the repair or damage to your principal residence that would qualify for a deduction under IRC 165 without regard to the 10% floor.
• Funeral expenses for your deceased parent, spouse, children or other dependents.

Often, when plans allow for hardship withdrawals, participants must provide proof of their need, and frequently they will not be permitted to make further contributions to the plan for some specified period, perhaps six months. Hardship withdrawals are taxable distributions that may also cause you to owe the 10% penalty tax for premature distributions. Under IRS regulations, your plan may allow you to "gross up" your hardship withdrawal amount to pay these taxes. Unlike loans, hardship withdrawals may not be repaid to the plan and will permanently reduce the size of your retirement benefit.

Is there a penalty for making a 401(k) account withdrawal?
There may be a 10% early withdrawal penalty if you withdraw money prior to reaching age 59½ and if you do not directly roll your withdrawal over into another qualified retirement plan or IRA. In addition, if not rolled over, the withdrawal amount will be taxed as ordinary income and will be subject to a mandatory 20% withholding tax for federal income.

How much of my account balance is mine if I end my employment?
You always have a fully vested ownership right to your contributions and any related investment earnings. You also may have a full or partial vested right to any contributions your employer may make to the plan on your behalf, depending on your length of service with your employer. (By law, for plan years beginning after December 31, 2001, you must be fully vested in any contributions from your employer at the end of six years of service or when you reach the plan's normal retirement age, whichever comes first.)

What is a 401(k) forfeiture?
A "forfeiture" is the portion of the employer's contribution that is lost by a participant who terminates employment prior to becoming fully vested under the plan's vesting schedule. Forfeitures may be used by the employer to reduce future employer contributions or to pay plan expenses. In addition, if the plan sponsor elects, forfeitures may be allocated to the accounts of remaining participants.

What happens to the money in my 401(k) account if I change jobs and leave my current employer?
Account "portability" is one reason why 401(k) plans are so popular. Generally, if you decide to change jobs you have three options:

• If your vested 401(k) balance is greater than $5,000, you can leave it in your former employer's 401(k) plan until you reach the plan's normal retirement date (though the plan may allow you to wait until you are 70½).
• If you receive a non-periodic distribution, you may directly rollover your vested balance into another qualified retirement plan or into an IRA. This means your former employer or plan administrator must make the distribution check payable directly to your new employer's qualified retirement plan trustee or to your IRA's custodian on your behalf (so you do not receive the money even temporarily and you can avoid immediate 20% federal income tax withholding as well as the 10% early withdrawal penalty).
• You can have a full or partial withdrawal made payable to you (instead of rolled over). This would result in numerous tax implications. The taxable portion of the distribution would be subject to federal income taxes for the year in which it was received, 20% federal income tax withholding and, possibly, a 10% early withdrawal penalty if you are under age 59½.

Can I take a loan from my 401(k) plan? If so, how does this work?
It depends upon the provisions of your employer's plan. Not all plans allow loans.

In general, if your plan permits loans, you take a withdrawal and promise to repay it, with interest, over a fixed period of time. The most you can borrow is 100% of your vested account balances up to $10,000 (if permitted by the plan) or up to the lesser of 50% of your vested account balance or $50,000, minus your highest outstanding loan balance over the last 12 months, whichever is less. If you continue to repay the loan, withholding taxes and penalties will not apply.

In general, as well, if you have an outstanding loan balance at the time you end your employment, and if you do not make repayment arrangements, the loan is considered to be in default and the unpaid balance is considered to be a taxable distribution.