How to fund your 401(k) safely for retirement, part 2

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.