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Retirement
and 401k’s: What Everyone Should Know
Many
U.S. based companies have changed the retirement outlook of this
country by straying away from traditional retirement pension plans
and focusing towards more profitable 401k plans. To help consumers
understand the basics of 401k plans, we at CreditGUARD of America,
Inc. have put together the following Do’s and Don’ts of 401k plans.
During the past few years, many U.S. based companies have changed
the retirement outlook of this country by straying away from traditional
retirement pension plans and focusing towards more profitable 401k
plans. This trend has been growing fairly consistently and the statistics
prove this point. Today, nearly one-fourth of the Fortune 1,000
companies have already changed or are considering changing their
pension plans to individual 401k plans.
Computer
giant IBM is the latest company to follow this new trend and joins
the list along with other big names such as Sears, Hewlett-Packard,
Motorola and Verizon Wireless. To help consumers understand the
basics of 401k plans, we at CreditGUARD of America, Inc. have put
together the following Do’s and Don’ts of 401k plans.
What
You Should Do
If your employer offers a 401k plan and matches a certain percentage
of your contribution, you should take advantage of this opportunity
without delay. An average employer matches 50 cents for a dollar
and up to 6 percent of an employee’s salary. What most employees
do not understand is that the employer contribution match is basically
‘free money’.
The
contributions you make towards your 401k come out of your paycheck
before taxes are taken out. As a result, you do not pay income tax
on the money you contribute to your 401k. The 401k earnings or capital
gains are also tax deferred until you reach your retirement age,
hence allowing your investments to compound and grow at a healthy
rate.
If
you are middle aged and have not yet put aside enough savings towards
your retirement, you should contribute the maximum amount allowed
by the government towards your 401k. In 2006, the government increased
the maximum contribution limit from $14,000 to $15,000 per year.
For those who are 50 years or older, the government may allow you
to contribute an extra $5,000 towards your retirement, also known
as “catch-up” contributions.
You
should carefully review your employer’s 401k plan and learn your
rights as a participating employee. Under U.S. law, you are eligible
to start contributing to a 401k plan after one year’s employment
with a company, provided one is offered. The U.S. Department of
Labor provides a publication detailing all consumer rights and obligations
relating to 401k plans on their website. Please click on the following
link to view the publication - http://www.dol.gov/ebsa/publications/wyskapr.html.
Finally,
you should design your 401k investment portfolio to meet your specific
financial goals. Most 401k plans offer employees various risk/return
options ranging from conservative to aggressive portfolios. For
instance, an investor who prefers a stable and uninterrupted flow
of future returns can opt for a conservative portfolio when compared
to another investor who likes to take on higher risk levels while
reeking in higher returns by investing in an aggressive portfolio.
Investors who prefer the middle ground can choose a moderate, balanced
or a growth portfolio.
What
You Should Avoid
401k’s can be a great retirement tool for as long as you do not
break the piggy bank until you reach the age of 59-1/2. If you decide
to withdraw money from your 401k before that date, you must pay
income taxes on your withdrawals in addition to the 10 percent early
withdrawal penalty. Also, when you tap into your 401k funds early,
you basically sacrifice your future compound earnings, which will
substantially shrink your nest egg.
Another
good point to remember is that when you leave your current job for
whatever reason, you should follow proper precautions when rolling
over your 401k to another employer or to an Individual Retirement
Account (IRA). Most people when leaving their jobs request the employer
to cash out their 401k’s and write out a check for them. In such
a situation, the employer is required by law to withhold 20 percent
of the funds for tax purposes. However, if you request your previous
employer to arrange a direct rollover (money transferred from your
previous employer to your new employer) without going through your
bank account, the tax withholding can be avoided.
CreditGUARD
of America is a non-profit credit counseling agency that assists
consumers through debt counseling and financial education. Please
visit our web site at www.creditguard.org
or call 1-800-867-0406 for a free consultation with a certified
credit counselor.
