Three 401k Blunders. Don't Make These Mistakes!
by: Roy Bodinus for the Debt Consolidation Loan
Directory
You may think that your employer and the IRS are two of the last places from
which you would receive a free and incredibly valuable gift. Think again!
Your 401k plan is a powerful benefit that allows you to take control of your
retirement destiny. Avoiding these three mistakes will increase the probability
you will be able to live a worry-free retirement.
Strike One: Not participating:
Most of today’s workers will not benefit from a lucrative defined benefit
pension plan. To what degree social security will be available to you upon your
retirement is debatable and uncertain. Providing for your retirement is no
longer your employer’s or the government’s responsibility. It’s yours!
Don’t let the, “I am too young” thoughts settle in your mind. Your 401k plan
offers you powerful tax benefits and the longer you wait to participate the
farther behind the retirement eight ball you become. Learn from those who are
nearing retirement: just ask a few fifty year olds if they wished they would
have started to save for retirement earlier.
Any contributions you make will reduce your taxable income for the year and will
grow tax-deferred until retirement. Many employers will also match a portion of
your 401k deferrals. This is free money – take it when you can because it
doesn’t come around that often.
The sooner you start participating in your 401k, the better. You won't have to
save nearly as much of your salary to reach your retirement goals if you start
in your twenties or early thirties, than if you start in your mid forties or
fifties. All isn’t lost if you get started late, however, it just means you will
have to aggressively save those final working years and you many not be able to
take quite as many exotic vacations upon retiring.
Strike Two: Not contributing enough:
Most financial planners will tell you to do just about anything in terms of
juggling cash flow and expenditures so that you are at least contributing enough
to your 401k to maximize your employer’s matching funds. Not all employers offer
matching 401k contributions, so you should latch on to this benefit and take
full advantage of it when you are lucky enough to have this opportunity. Your
employer’s matching contribution is in essence a 100% guaranteed investment
return. Where else can you get that return on your money? I’ll answer that for
you…nowhere!
Contributing early and often to your 401k will not only allow you to reap the
inherent tax benefits and the company matching funds, but it will also increase
the probability of meeting your long-term goals by aiding in the compounding
effect. The power of compound growth is difficult to comprehend. Consider the
illustration of the 18 year old that saved $4,000 a year until he was age 55 and
earned 10% on his money along the way. He would end up with over $1.3 million at
age 55.
Don’t let the temptation of spending now and saving later take hold. It will
have devastating long-term effects. Save as much as you can as early as you can.
Strike Three: Cashing-out:
When you switch jobs or retire, you have a decision to make regarding how you
will handle the retirement savings you have accumulated in your 401k account.
Cashing-out of your former employer’s 401k is rarely the best option. The amount
of your distribution will be reported to you as taxable income, and if you are
under the age of 59 ½, you may also be subject to additional penalties.
The advantage of taking a lump sum distribution or cashing out of your former
employer’s 401k is that you have immediate access to your funds. This access
comes at the steep cost, though, of triggering a taxable event and possible
penalty situation, as well as giving up the powers of long-term tax advantaged
compound growth.
For these reasons, utilizing a 401k rollover is oftentimes the best decision and
helps to position you for a retirement that is both rewarding and relaxing.
Copyright © 2007 Northwest Advisory Group, Inc. The views in this article do not necessarily reflect those of the Debt Consolidation Loan Directory.
This article is for educational purposes only and is not a personal recommendation of any strategy or product. You should not make any changes to your financial situation based only on this article. It is advised that you consult a qualified advisor and tax professional to evaluate your situation before making any changes to your finances.