401(k) plans are becoming the retirement plan of choice for more and more companies, large and small. They offer pretax contributions, tax-deferred growth, and often matching employer contributions. But studies show that many employees don’t maximize the benefits available to them. Here are some tips to get the most from your 401(k).
- Contribute the maximum you can afford.
Every dollar you can contribute reduces your current year’s taxes and adds to your tax-sheltered retirement savings.
At a minimum, try to earn the full matching contribution from your employer. If the company matches 50 cents on the dollar, for example, it’s like earning a guaranteed first-year return of 50% on your contribution. And that’s before any other investment earnings.
- Don’t overlook the catch-up contributions.
Your regular contribution limit for 2005 is $14,000. But if you’re age 50 or older at any time this year, you can make a further $4,000 “catch-up” contribution.
And you don’t have to wait until after your birthday to start making the extra contribution.
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Diversify your investments.
Aim to invest in a diversified mix of stocks and bonds appropriate for your age. Don’t invest everything in your own company’s stock.
Your regular salary already depends on the company’s success — don’t risk your retirement savings too. Think what happened to the Enron employees if you’re tempted.
If you need investment advice, ask the plan administrator for materials to read. Or consult with your own independent advisor.
- Don’t withdraw your savings early.
If you leave the company, you can roll your 401(k) into an IRA and preserve the tax benefits. Otherwise it will count as taxable income and you’ll generally pay an additional penalty if you’re under age 59½.
You can make hardship withdrawals under certain circumstances, and the plan may allow you to take loans. But try to use 401(k) funds only as a last resort. Remember these are your retirement savings.
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Don’t rule out a 401(k) if your income is low or if you’re self-employed.
Low-income employees can receive a tax credit for making contributions to a 401(k) plan. Ask about the “retirement savings contribution credit.”
And if you’re self-employed, look into the “solo” 401(k) plans which are now available, even for unincorporated businesses.
For more information or assistance, contact our office.
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