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it is withdrawn.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until money is withdrawn.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).
Why am I contributing
the monthly amount?
Can I afford to contribute
more?
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.)
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.