Americans didn’t ace this retirement pop quiz.
Only about one in five Americans know how much they’re allowed to contribute to a 401(k) plan and a little more than a quarter know nonworking spouses can contribute to an individual retirement account, according to a TD Ameritrade survey of more than 1,000 adults 22 years or older with at least $10,000 in investible assets.
But that’s a problem, considering so few people are saving enough for their futures or even understand how much they need to save to get there. About 18% of Americans say they’re “very confident” they’ll have a financially comfortable retirement, and 49% said they were “somewhat confident,” according to Employee Benefit Research Institute data. Not only do people underestimate how much they’ll need for the future, but they may not know how to start investing or what the rules are — as the TD survey results suggest.
Here are some basic questions about retirement saving — and the answers.
See: 10 of the easiest, most effective ways to save for retirement
For 401(k) plans:
What is the 401(k) contribution limit?
The contribution limit for 401(k) plans in 2019 is $19,000, with an additional $6,000 for those who are 50 and older (called a “catch-up contribution”). Only 19% of Americans knew that answer, while more than a quarter thought the limit depends on income. Another 12% thought the limit was $18,500, which it was in 2018, and 9% thought there was no limit. Others guessed more or less what the contribution limit actually was.
Almost six in 10 Americans agreed a company match — where the company contributes an additional amount of money less than or equal to the employees’ contributions — was “free money,” whereas 43% disagreed.
What does it mean to ‘max out’ a 401(k)?
To max out a 401(k) plan is to meet the contribution limit, which the Internal Revenue Service sets. Many participants — 57% — got that question right, while a little more than a third said it was to get the full employer match.
Maxing out a 401(k) plan is surprisingly rare. Only 13% of plan participants did so in their Vanguard accounts in 2017 (when the limit was $18,000), according to a 2018 report. Vanguard investors are typically higher-earners, older and have been with their employers longer. Comparatively, 9.1% of workers whose 401(k) plans were parked at Fidelity Investments had maxed out their accounts.
Don’t miss: All the ways you can mess up your 401(k) — even if you max out your contributions
How much are you paying in fees for your employer-sponsored account
Only a third of Americans know how much they’re paying in 401(k) fees. Retirement plan fees, which are charged to administer or manage accounts, can be costly, and can impact your future wealth. Fees reduce how much the plan has in assets, which means less money is growing with investment returns or interest. Fees range by the size of the plan and the firm hosting the account, but are typically somewhere below 1% to up to 3.5% a year. One Yale University study considered anything more than 1% to be a “rip-off.” Investors can learn about fees by looking at their summary annual report, a document that lists expenses, benefit amounts and total plan assets, or by directly asking the investment firm managing their account.
Can you contribute to a 401(k) and a traditional IRA at the same time?
Yes. Slightly more than half of survey participants got this question right, while about a fifth said they didn’t know and 11% said no. Others thought the answer was yes, but with certain requirements, like being 50 or older or if it were a Roth account. With a traditional IRA, an investor contributes pretax dollars and those assets are later withdrawn and taxed, compared with a Roth account, where money is invested with after-tax dollars but then withdrawn tax-free.
For traditional IRAs:
What is the contribution limit for IRAs? And when is the deadline?
The contribution limit for traditional IRAs is $6,000, but only a little more than a third of survey participants knew that. Another 25% said it depends on income, and 16% said it was $5,500, which was the limit in 2018. The catch-up contribution limit is an additional $1,000 for investors 50 and older.
The deadline to contribute to an IRA in 2018 is April 15, 2019, but about 80% of people didn’t know that. Most — 28% — said they didn’t know, a little more than a fifth said it was Dec. 31, 2018, and 13% said it was Jan. 31.
Also see: This common retirement savings advice is sneakily wrecking people’s finances
Can a non-working or low income-earning spouse contribute to a traditional IRA?
Only 26% of participants knew non-working or low-income earning spouses could contribute to a traditional IRA. But a non-working spouse can make a deductible contribution up to $6,000 (or $7,000 if they’re 50 or older) this year if they and their working spouse file their taxes jointly and has earned income that equals or exceeds both of their contributions.
There are limits and phase-outs for situations where the working spouse has access to a qualified retirement account (such as a 401(k) plan). In that case, the non-working spouse’s contribution’s deductibility is phased out if they have a joint adjusted gross income between $193,000 and $203,000, whereas the working spouse will be phased out of deductibility if their joint AGI is between $103,000 and $123,000.
Do you need to be in a certain tax bracket to qualify for contributions to a traditional IRA?
Six in 10 Americans think you need to be in a certain tax bracket to qualify for contributing to a traditional IRA, which is wrong.
Individuals can invest in an IRA so long as their income is earned, as opposed to generated passively (such as from another investment portfolio). Although workers can contribute to a 401(k) and IRA, they may face limits on how much they can deduct come tax time, according to Personal Capital. For example, a single individual with a modified adjusted gross income of up to $64,000 can deduct as much as the contribution amount, but could only take a partial if their income was between $64,000 and $74,000, and not at all if they earned more than $74,000.
What are required minimum distributions?
Ignoring required minimum distributions for qualified retirement accounts and traditional IRAs is an expensive mistake, yet 62% of participants are unaware of what those are. Required minimum distributions are a set amount of money the IRS says Americans must take from their retirement accounts once they turn 70 ½ years old. The amount required for withdrawal depends on a formula that looks at the prior year’s account balance and account holder’s age.
Taxpayers must start taking these withdrawals by April 1 of the year after they turn 70 1/2, although they can take it by the end of the same year if they choose. Thereafter, each distribution must be done by the end of December. If an account holder chooses to take an RMD by the April 1 after they turn 70 ½ (and say they turned 70 ½ in the prior September), they must take the RMD for the year they turned 70 ½ as well as for the current year. Taking two RMDs in one year could risk bumping up a tax bracket.
Missing the deadline incurs a 50% penalty of whatever the distribution should have been. For example, if an individual should have withdrawn $5,000 but didn’t take anything, she would incur a $2,500 penalty. If she withdrew $4,000, she’d incur a $500 penalty (half of the remaining $1,000 she was obligated to withdraw).