In a Damaged Economy, Can I Lose My 401(k) if My Company Files Bankruptcy?

For quite some time now, the state of the economy has been a cause for concern on a variety of fronts, but one of the biggest concerns voiced was for the future of many individual’s 401(k) plans. After all, the vitality of these funds depends heavily upon the company’s performance that it is tied to, as well as the individuals association with that company—with so many being laid off, how could concern not flow freely?

Retirement

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One of the best cures for concern, fear, and every emotion of its kind, though, is knowledge. The best thing that you can do to protect yourself, as well as your 401(k), is to be prepared and to know your options.

In order to assist in this endeavor, below is a list of commonly asked questions about this concern for you to consider, with answers you can add to your knowledge-base. If you want to find out more about how you may be affected, you can check out the Suncorp superannuation calculator.

Q: What happens to my 401(k) if my employer goes bankrupt?
A:
The answer to this question largely depends upon what kind of bankruptcy your employer has filed; it will either be a Chapter 11 or a Chapter 7 bankruptcy. Both will render different results.

Q: What happens as a result of a Chapter 11 bankruptcy?
A:
When this bankruptcy is filed, your employer intends to restructure all of their assets in order to overcome their financial depression. During this restructuring, 401(k) plans may continue on; however, if part of the restructuring is to cut back on benefits, you may lose any matching contributions the company may have made if you’re outside of your company’s designated vesting period.

Q: What happens as a result of a Chapter 7 bankruptcy?
A:
When this bankruptcy is filed, you employer intends to liquidate; when this happens, your 401(k) plan has a high probability of being terminated.

Q: Is there any kind of protection for my 401(k), should a Chapter 7 occur?
A:
Yes; under the Employee Retirement Income Security Act (ERISA) of 1974, the funds held within your 401(k) account must be held separate from company assets and must be protected from creditors; typically, they’re held within a trust or insurance account for safekeeping.

It’s important to keep in mind, however, that any payroll deductions your employer hasn’t yet sent over to the 401(k) will not be recovered.

Q: How often does my employer transfer deductions to my 401(k)?
A:
Your employer is required to transfer all payroll deductions into their individual 401(k) accounts no later than 15 business days past the end of the month within which they were drawn.

Matching contributions that your employer may have been making sometimes occur less frequently (i.e. quarterly, semi-annually, or annually) and therefore might not make the transfer before the bankruptcy occurs.

It’s a good idea to regularly check your 401(k) account statements to monitor this activity, but if your 401(k) comes up a bit short due to bankruptcy, you’ll probably find that the deductions from your most recent paycheck never made it through.

Q: What happens if my 401(k) funds are distributed to me before I reach the age of 59.5 due to company bankruptcy? Am I required to pay taxes on the funds in the account?
A:
If you decide to keep the funds, yes, you will have to pay the same taxes and penalties that you would have paid had you withdrawn your 401(k) before the designated retirement age. You can avoid this, however, by simply rolling the funds from the account over into a new account with a new employer, continuing your 401(k) plan with little, to no, financial interruption.

The Basics of Investing

Before becoming serious about investing, it is important to handle some other financial basics first, such as establishing an emergency fund and paying off high-interest debt. If you have already done that and are now looking to learn about investing, you may be confused by some of what you’re reading. Here are a few basic pieces of information that should help you navigate all of your research:

What is Investing? Investing is defined as, “Expending money with the expectation of achieving a profit or material result by putting it into financial schemes, shares or property, or by using it to develop a commercial venture,” but, in short, it simply means that you are putting your money somewhere in the hopes of earning more money by doing so!

Who should invest? As mentioned, if you have taken care of the basics with regard to your financial matters, you may want to look into investing because it will give you a chance to grow your money at a rate that outpaces inflation, especially if you are looking at a long period of time.

What are some types of investments? Some common investments include, though are not limited to, savings accounts, bonds , stocks and real estate. In the case of a savings account or a bond, you are lending your money to a bank, company or government, and they are paying you interest for the privilege of borrowing it. In the case of stocks or real estate, you are buying something (either a piece of a company or a house or building) and hoping that that purchase rises in value over the course of time that you own it.

Can I lose money when investing? Yes, as many investors learned in 2008, you can certainly lose money. There are a variety of investment products and some carry more risk than others. For example, a savings account is typically a very low-risk investment. You will not make a great deal of money with it, but you will not risk losing your money. The price of a stock changes daily, and you could lose quite a bit of money in a short time if something happens to the company whose stock you own. However, by the same token, you may make a good deal of money if the company does very well.

You may decide to do research on your own or consult a financial adviser, but because you are usually putting your money at some sort of risk level, you should always make sure you are comfortable with whatever investment plan you put in place.

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Spread Betting and the Stock Market

This past week offered the worst performance of the stock market so far in 2012, and the outlook doesn’t look much better for many factors: the global economy, rising debt, poor employment, political instability in Greece and a Spanish banking crisis. With such uncertainty in the market, there will inevitably be a lot of volatility in stocks and other financial products. It is important to look for an investment that allows you to play off this volatility.

Stock Market

Spread Betting

That is where spread betting comes into play. Spread betting is very similar to options trading, where you can profit from moving prices, whether they are going up or falling down. Just like investing in a call or put, you take a position and indicate whether you believe the market will rise or fall. You profit if you are correct in your spread bet.

For example, if you think a major index will increase in value over the next month, you buy that spread, and you can profit if the price moves higher. However, if the index doesn’t go higher and falls against your buy price, you will encounter a loss.

The Benefits of Spread Betting

Spread betting has some benefits that are different from a traditional options trade or indeed regular share dealing. Depending on the provider you use, you get choices on which investments you can bet on. If you choose a provider like City Index, there are literally thousands of different options to bet on. You can bet on stocks, indexes, currencies, commodities, sectors, and more.

Another benefit of spread betting is that you trade with leverage meaning that you can take a large position for a relatively smaller initial deposit (similar to a mortgage on a house). The amount of leverage once again lies in which company you invest with, but since your trades are leveraged, you can increase your gains dramatically. However, at the same time, you need to be cautious because leverage can also exaggerate a loss as well.

Finally, spread betting UK profits can be tax free, unlike profits from trading stocks or options. This is because many jurisdictions treat the profits from spread betting different than regular investing income. This can make a profitable trade even better since you don’t have to tax tax on the gains! However, UK tax laws are subject to change and may differ depending on your personally circumstances.

Why Your Children Should Open a Roth IRA at Age 18

I remember when I started saving for retirement. My employer announced that they were going to begin a 401k plan with a match. I didn’t know much about investing at the time, aside from the facts that I:

  1. Wanted to retire as early as possible,
  2. Knew the match was like free money (I like free money)
  3. Heard 401k plans are a good way to go.

Starting at 21, I was probably ahead of the curve. Many of my friends began their savings the next year, after graduating from college. I’m certain that there are many others that put off saving well into their careers. The point I’m trying to make is that most people are faced with the option of saving for retirement by the time they have a job. That’s not to say that they make the smart choice of actually opening an account.

Bull Market Wall Street

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