1. When can I begin to participate?
2. What does vesting mean?
3. When will my company's contribution be vested?
4. Can I have a 401(k) if I am self-employed?
5. Can I have a 401(k) account with my current employer even after rolling over a 401(k) from my previous employer into an IRA? Can I have both accounts?

1. When can I begin to participate?

That depends on the rules of your specific plan. Many companies require new employees to complete six months or even up to a year of service before they're eligible. Some companies also require employees to be at least 21 years old to participate.

Ask your company's human resources or benefits representative for information on your plan.

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2. What does vesting mean?

The "vested" portion of your 401(k) account is the part that belongs to you and cannot be forfeited if you leave your job.

There are two types of 401(k) contributions: the contributions you make and the contributions your employer makes (such as a matching or profit-sharing contribution). The money you contribute, adjusted for any investment gain or loss, is always 100 percent vested. That means this money is always 100 percent yours.

The contribution your employer makes, on the other hand, may be subject to a vesting requirement. This means that you must earn your employer's contribution over time. In 2002, the maximum vesting period was reduced as a result of the 2001 tax law.

Vesting requirements are very common in 401(k) plans. The two types of vesting schedules are graded vesting and cliff vesting.

With graded vesting you own an increasing portion of the employer contribution each year you are with your company. If your company had a five-year graded vesting schedule, you might be 20 percent vested after one year, 40 percent vested after two years, etc. By law, the longest graded vesting schedule a 401(k) plan can have is six years (down from seven years in 2001). Employees must be at least 20 percent vested after two years of service and an additional 20 percent for each subsequent year until in year six, the account is 100 percent vested.

With cliff vesting the employer contribution becomes 100 percent vested after a set period of time. So if your vesting requirement is three years and you leave your company after two years, you won?t get any of the employer contributions. Currently, the longest cliff-vesting schedule allowed by law is three years (down from five years in 2001).

The reason companies include a vesting requirement in their 401(k) plan is that it provides an incentive for employees to stick with the company.

Say, for example, your company's 401(k) plan has a four-year graded vesting schedule, with 25 percent of the employer match vesting each year. The employer match is 50 cents on the dollar. After two years, when you are 50 percent vested, you decide to leave your job.

Your 401(k) account balance consists of:

Your contributions (adjusted for investment gain or loss) = $7,000

Employer contributions (adjusted for investment gain or loss) = $3,500

Your total account balance is $10,500. But your vested account balance is only $8,750 ($7,000 plus 50 percent of $3,500). So by leaving your job after only two years, you've essentially "lost" $1,750.

One last tip: if you are planning to leave your job, make sure you find out when the employer matching contributions are deposited into the account. Some employers deposit matching contributions every pay period, but others only make the deposits once a year. In such a case, if you were to leave your job before the contribution for the most recent year were deposited, you could lose a whole year's worth of matching contributions.

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3. When will my company's contribution be vested?

That depends on the rules of your particular plan. Plan sponsors have some flexibility in deciding vesting schedules when the plan is set up. In some plans, participants are 100 percent vested as soon as they join the plan, while in others, participants have to complete a number of years of service before they're fully vested.

By law, all participants must be fully vested after six years of service with the company. (If your employer has a cliff-vesting schedule, you must be vested after three years of service, the law states.) Additionally, a few guidelines typically apply to most plans. For instance, in most plans, a participant automatically becomes fully vested when he or she reaches the plan's defined retirement age (commonly age 65), becomes disabled, or dies, or if the plan is terminated.

You should check with your company's human resources or benefits representative regarding the rules of your specific plan.

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4. Can I have a 401(k) if I am self-employed?

Regular 401(k) plans are normally established by for-profit companies that have "more than a few" employees. While there is no set minimum for the number of employees required, a regular 401(k) is probably not the best choice for a self-employed person due to plan set-up expenses and the time commitment surrounding plan administration.

For self-employed people, there are several tax-deferred retirement savings options available beyond the traditional and Roth IRAs. These plans allow larger contributions, but also require a bit more paperwork. They include:

• Simplified Employee Pension IRA (SEP-IRA) Plans -- SEP plans are essentially individual retirement accounts (IRAs). Like an IRA account, the money you contribute to a SEP-IRA is tax-deductible and your investment earnings grow tax-free until you withdraw funds at retirement. For 2002, if you are the only participant in the plan, you can deduct contributions of up to 25 percent of your compensation or $40,000, whichever is less. If you have employees, in 2002, they may contribute up to 100 percent of their compensation or $40,000, whichever is less. (In 2001, the limit was 15 percent of income or $35,000.)
• Keogh Plans -- If your business is not incorporated, you may be eligible to establish a Keogh plan. Keogh plans are generally more flexible than SEPs and may allow you to save even more toward your retirement than you can in a SEP plan. For 2001, you can save up to $40,000 in combined employer and employee contributions in a Keogh. (The 2001 limit was $35,000.) Keogh plans must be set up as either a defined-contribution plan [like a 401(k) or SEP] or as a defined-benefit plan (like a traditional pension). In other words, you will need to have a plan document. For that reason if you're considering a Keogh plan, you may want to seek the advice of a pension professional.
• SIMPLE IRA -- A SIMPLE IRA works a lot like a traditional IRA except you can contribute more (up to $7,000 starting in 2002) and employer matching contributions are allowed. (In 2001, the limit was $6,500.) There is no percentage-of-salary limit on contributions. In the case of a self-employed person, you can contribute $7,000 as an individual and your company can match your contributions dollar-for-dollar, for a total annual contribution of $14,000 ($13,000 in 2001). Another plus is that the SIMPLE plan you set up now can grow with your company (up to 100 employees).
• SIMPLE 401(k) -- A SIMPLE 401(k), which is a variant of the SIMPLE IRA, can be set up for companies with up to 100 employees. The maximum salary deferral allowed per employee in 2002 is $7,000 or a percentage of salary specified by the employer, whichever is less. (In 2001, the limit was $6,500.) The employer must make either dollar-for-dollar matching contributions up to 3 percent of compensation for each employee (for a total employer and employee contribution of up to $14,000 [$13,000 in 2001]), or non-elective contributions of 2 percent of compensation on behalf of each eligible employee who receives $5,000 or more in compensation from the employer.

Setting up any of these plans is as easy as visiting your local bank, broker, insurance agent, financial planner or mutual fund company.

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5. Can I have a 401(k) account with my current employer even after rolling over a 401(k) from my previous employer into an IRA? Can I have both accounts?

You may have a 401(k) with your present employer after rolling over a previous 401(k) into an IRA. You may hold any number of IRA accounts in addition to your 401(k), as long as you meet the necessary requirements and do not exceed the aggregate contribution limit (a total of $3,000 in 2002 for the combined IRAs). In 2001, the IRA contribution limit was $2,000.

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