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Business & Finance
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Are you getting the most out of your 401K?
By:
Larry Westfall
Perhaps a better question would be – Are you putting in the most into your 401K so you can get the most out of it?
First off – if your employer offers a 401K, run, don’t walk to your Human Resources department and immediately sign up for it. You will have to fill out some forms for an automatic withdrawal and have to choose where your investment will be, but it should be relatively painless.
You really want to ensure that you are getting the maximum that your employer is giving. All funds differ, so you will have to read the company policy governing yours. But most employers provide some sort of matching. It could be 2% or 3% of your gross pay or it could get a little more complicated. I had one plan that my employer matched ½ of a percent for every percent I put in. So, if I put in 6% of my pay, my employer matched with 3%. If I had only put in 4%, the company would have only put in 2%. Unfortunately, there was a 3% ceiling, so, even though I was investing 10% of my earnings, the company put in 3%.
The one thing that you want to make sure that you do, no matter what the company’s policy is, is to ensure that you get the absolute most from the company. In the example above, I always advised my co-workers to put in “at least” 6% so that they would get the full 3% from the company. I also encouraged them to invest more, but to at least put in 6%.
The two main reasons to invest in your 401K are tax-deferred income and free money from your employer. You won’t have to pay taxes on your 401K until you start to use it after you retire (and most likely with a lower tax base). Let me give you an example of the “free money.” Let’s say that you earn $50,000 and you put in 6% of your pay and your company matches with 3%. During the course of one year, you will have invested $3,000 and your employer will add $1,500. Not even looking at what your investments did, you just made a whopping 50% on your money. And all you had to do was show up at work!
Another consideration for putting in as much as you can afford (within IRS guidelines – which change annually – for 2005 it is a maximum of $14,000) into your 401K is no one knows if social security will be around when it is time to collect. So, it is a good idea to look after your own finances and have some money saved for your golden years. And – for those of you over 50 – you can put in extra money – “catch-up” – for 2005 it is $4,000. For 2006 and after – you can invest $15,000 and add $5,000 for the catch-up contribution.
So – get out there and get saving!
About the author:
Larry Westfall is the owner of DIY Investing - http://www.pennystockebook.com
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