401(k)s

A 401(k) is a type of employer offered pension plan. The employee decides how much he/she wants taken out of his/her paycheck monthly. The money is contributed before taxes are deducted. The investment accumulates tax-free until it is withdrawn.

• 401(k)s offer many advantages that make them attractive to the retirement investor.
  
  • Payroll deduction makes it easy and convenient to contribute.
  • Some employers will contribute a part or even match monthly contributions.
  • No taxes paid on contributions until money is withdrawn.
    • Allows for more effective compounding
  • Puts investor in a lower tax bracket.
  • Ability to diversify savings. Investor can choose where his/her money is being invested.
    
    
• There are, of course, a few disadvantages to a 401(k) retirement plan.
• It is difficult (or expensive) to gain access to the money in the account before the investor is 50 ½. Reasons for early withdrawal are as follows: a court order to give some or all of the money to a spouse, child, or dependent; total disability; and death (the money goes to a beneficiary).
• Employer contributions are usually not vested, meaning they do not become property of the employee, until a number of years have passed.
• There is a limit set by the Internal Revenue Service each year that limits the amount of money that can be contributed to a 401(k). In 2000, that limit was $ 10,500.
  
  
• Questions to ask yourself when investing in a 401(k).
  1. Why am I contributing the monthly amount?
  2. Can I afford to contribute more?
  3. How much am I going to need when I retire? (Financial planners estimate that a person needs 70% of their current yearly income in order to have a comfortable retirement.)
  4. Am I comfortable investing in options with a higher amount of risk?
     
     
• Adding to a 401(k)
  • There are additional ways to put money into a 401(k).
    • Refinance your home and put the extra money in your 401(k). Be careful. There are risks involved in refinancing. Consult a financial planner.
    • Some bonuses are eligible for deposit.
    • Monthly or weekly contributions can be deposited depending upon your employer

Like all retirement plans, starting early is the key. By investing wisely and early the investor maximizes the potential for long term growth and future financial stability.