If you read yesterday's entry on 401(k) funding, here's some more advice.
1. Prospectuses are not written for the public audiences. Reading a prospectus without the language and understanding of what's involved is the same as going into a dark room without a flashlight. Even the items intended for the general public tend to read like a thick book of gibberish. If you're not sure of how your funds will be invested, it doesn't hurt to ask a financial adviser or your 401(k) administrator. Don't let them talk you into adding more money than you're willing to invest.
2. Be aware of your tax brackets. This is true at all stages: first job, current job, and retirement. If you're in the 15% tax bracket, contributing to a 401(k) plan pre-tax will certainly reduce your taxable income - the nicest thing about contributing to a plan like this, and these contributions can be put onto your tax form, along with your company's matching contributions. When you retire and begin to take the money out, however, your tax bracket will change depending on the funds and fees. Taxes must be taken out on any distributions due to you, which may raise you to perhaps the 25%-35% bracket.
3. Like to go solo? IRAs may fit the bill. Individual retirement accounts work just the same as 401(k) accounts, but you don't get a company match, and the most you can contribute to a IRA is $4,000 per year. On the other hand, some IRAs do not carry a 10% IRS penalty for withdrawals, but it's the "once it's gone, you can't replace it" variety, meaning you have to rebuild it from scratch. You can also supplement your 401(k) with an IRA, and vice versa.
4. Contribute 0% to your 401(k)? You're not alone. Not funding your 401(k) is considered a sin in the financial world, but a forgivable sin depending on your circumstances. If you're a college graduate paying $1000+ a month in student loans, a first-time homebuyer paying $1500+ per month in mortgages, or someone who has a mountain of credit card bills, those siren calls of "your leaving money on the table!" will force some to overcompensate their contributions, and bring them into worse financial shape than they were before. Which is worse - not contributing to your 401(k) plan, or having your wages garnished for student loan default, or your home foreclosed, because you neglected to plan ahead of time? Relax. Even a 2% contribution may be a head start and enough to start a nest egg, and your employer will do it for you thanks to a new law. Sometimes that money on the table is best taken a sawbuck at a time - but when that mortgage is paid off or the student loan is finished, THEN start putting more and more money into your account.
7/17/2007
How to fund your 401(k) safely for your retirement
Consumerist has three common mistakes...but neglect a few things we've noticed when we look in our statement.
1. A 401(k) account is NOT a substitute for financial planning. Your other obligations - rent, bills, debt, funding emergency accounts - come first. Then, any discretionary income you have left over you can put into your retirement fund.
2. 401(k) funds have fees - which is why 401(k) administrators encourage you to put money into the retirement account. Even if you do nothing, your 401(k) administrator can slice anywhere from 0.5% to 2% of your account in various fees. 2% may not seem like much, but if you manage to save $1 million for your retirement account, $20,000 gets sliced off for such mundane things as reports, research, pressing the RETURN button, etc. All that company match goodness...down the toilet.
3. Contribute only what you can afford. You can save up to the $15,500 limit in your 401(k), but most people save around 6% to receive the optimum company match. After the $15,500 is met, the company match ends - you can still contribute but you won't get any further company match from your employer. Don't be the idiot who saves 30% of their salary in their 401(k) and end up being short on your rent, bills, etc.
4. Remember the ages of 59.5 and 70.5. Those are the ages when you can withdraw funds. Younger than 59.5 - 10% IRS penalty if loan not paid back in 5 years. Older than 70.5 - 50% on difference of minimum distribution if not selected. In between - no penalties, but may select to take all or minimum.
5. If you don't know how to invest, don't contribute to your 401(k) until you have a clear idea what your goals are, what risk you're willing to take, and how much you need. Don't fund your account just because Suze Orman and Jim Kramer tell you to; all that extra money goes to fees and maintenance. Unless you know where you're going, and have everything mapped out, the money "on the table" from your employer might as well be set ablaze if your investment decisions and contributions sink like a rock.
6. Matched contributions from your employer DOES NOT EQUAL "free money." Another thing that the financial gurus proclaim is the biggest thing about 401(k) accounts is that if you don't contribute, it's leaving money on the table. Hogwash. Matched contributions are not free - they are an appreciation of your service from your employer, sometimes in lieu of other compensation (e.g. an employer may give you a profit sharing bonus in your account rather than a bonus check, scalped in half by taxes). If your work ethic is bad, you're a slacker on the job and only exist for a paycheck, you're stealing that 401(k) match that a harder-working employee could use to supplement their accounts. That "free" money can also be eaten up by fees and penalties if you're not careful. A better way of considering a company match is as an encouragement - not a reward.
Discussion to be continued...
1. A 401(k) account is NOT a substitute for financial planning. Your other obligations - rent, bills, debt, funding emergency accounts - come first. Then, any discretionary income you have left over you can put into your retirement fund.
2. 401(k) funds have fees - which is why 401(k) administrators encourage you to put money into the retirement account. Even if you do nothing, your 401(k) administrator can slice anywhere from 0.5% to 2% of your account in various fees. 2% may not seem like much, but if you manage to save $1 million for your retirement account, $20,000 gets sliced off for such mundane things as reports, research, pressing the RETURN button, etc. All that company match goodness...down the toilet.
3. Contribute only what you can afford. You can save up to the $15,500 limit in your 401(k), but most people save around 6% to receive the optimum company match. After the $15,500 is met, the company match ends - you can still contribute but you won't get any further company match from your employer. Don't be the idiot who saves 30% of their salary in their 401(k) and end up being short on your rent, bills, etc.
4. Remember the ages of 59.5 and 70.5. Those are the ages when you can withdraw funds. Younger than 59.5 - 10% IRS penalty if loan not paid back in 5 years. Older than 70.5 - 50% on difference of minimum distribution if not selected. In between - no penalties, but may select to take all or minimum.
5. If you don't know how to invest, don't contribute to your 401(k) until you have a clear idea what your goals are, what risk you're willing to take, and how much you need. Don't fund your account just because Suze Orman and Jim Kramer tell you to; all that extra money goes to fees and maintenance. Unless you know where you're going, and have everything mapped out, the money "on the table" from your employer might as well be set ablaze if your investment decisions and contributions sink like a rock.
6. Matched contributions from your employer DOES NOT EQUAL "free money." Another thing that the financial gurus proclaim is the biggest thing about 401(k) accounts is that if you don't contribute, it's leaving money on the table. Hogwash. Matched contributions are not free - they are an appreciation of your service from your employer, sometimes in lieu of other compensation (e.g. an employer may give you a profit sharing bonus in your account rather than a bonus check, scalped in half by taxes). If your work ethic is bad, you're a slacker on the job and only exist for a paycheck, you're stealing that 401(k) match that a harder-working employee could use to supplement their accounts. That "free" money can also be eaten up by fees and penalties if you're not careful. A better way of considering a company match is as an encouragement - not a reward.
Discussion to be continued...
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