|
Five top 401(k) tips
|
 |
June 28, 2000: 2:25 p.m. ET
Keep in mind these important points when investing in your company's 401(k) plan
By Staff Writer Jennifer Karchmer
|
NEW YORK (CNNfn) - Most people have heard about the benefits of a 401(k) plan, but it can be intimidating trying to figure out how to get started.
Investing in your employer's retirement plan doesn't have to be complicated or time-consuming. The trick is putting money away as soon as you can - and making sure you understand the rules.
So whether this is your first job out of college or you're taking another step on the career ladder, here are five tips to keep in mind before getting into your new 401(k).
"Get in as quickly as you possibly can," said Michael Smith, a certified financial planner from Atlanta. "Contribute as much as you can, don't stop at the matching point, and continually increase your contributions as you get a raise."
The government created tax-deferred 401(k) retirement plans to encourage workers to save using pre-tax dollars. Through automatic payroll deductions you can siphon off money from your gross pay and you won't pay taxes on it until you withdraw the money. Federal guidelines say you can save up to 15 percent of your salary each year, or $10,500.
1. Find out what the waiting period is to contribute
Many companies require you work for them for at least three to six months to enroll in their 401(k) plan. This is to weed out job-hoppers who leave after a few months.
Some companies may make you wait as long as a year. But whatever the time, planners suggest you mark your calendar and contact your benefits department to get in as soon as you are eligible.
"Tag your calendar and be ready," to contribute to take advantage of compounding, says Tom McFarland, a certified financial planner from Concord, Mass.
2. Find out what your company matches
How much your company will match varies widely. One survey found that about 87 percent of companies match their employee's contributions by some percentage, according to Dee Lee, author of "The Complete Idiot's Guide to 401(k) Plans." The most common match is 50 cents on the dollar, up to six percent of pay.
Let's say your salary is $50,000 and your company will match 50 percent of the first six percent of your contributions. That means that if you contribute six percent of your pre-tax dollars, or $3,000 in a year, your company will put in another $1,500, making your annual contribution $4,500.
If you contribute less than six percent, you would miss out on your company's full match. That's like throwing money away, Smith said.
3. Decide how to allocate your dollars
One thing to keep in mind with your 401(k) is that you'll be limited to funds that the plan offers. Many companies try to use a variety of funds from big families like Vanguard or Fidelity, so it will be easy to spread your money in different asset classes. But not all plans have as many choices.
It will be up to you to make sure you have the right asset allocation for your age, risk tolerance and retirement goals.
Either way, planners suggest you do your homework and read each fund's prospectus to find out the investment objective and learn about its performance.
Got fund questions? Click here
"Ask yourself if you had a choice, would you invest in the funds that your 401(k) offers," McFarland said. "Just pick the best of what's offered."
4. Understand the rules if you borrow
If you're like most people, then you've got bills to pay, you're thinking about buying a bigger house or getting that sports car you've always wanted.
But financial planners suggest you steer clear of borrowing from your retirement savings because you'll only be hurting your long-term nest egg.
"You should separate in your mind and say, this is retirement money, it's not a savings account," Smith said of your 401(k) plan.
Many plans require that your loan be used for only one of these reasons, according to Lee: Education expenses; to prevent eviction from your home; for unreimbursed medical expenses; or to buy a first-time residence.
You can repay yourself the interest usually at a rate of about six to seven percent.
However, as Smith points out, you lose the benefit of compounding by repaying yourself the interest at seven percent while the stock market has historically returned 11 percent. With that in mind, many planners suggest you steer clear of borrowing from your 401(k) unless it's an emergency.
"It's just going to take so much money to have an adequate retirement," Smith said.
Another thing to keep in mind is if you leave your job before you pay back the loan, you'll need to pay it off or be subject to tax and a 10 percent penalty for an early distribution.
5. Ask if you should roll over other retirement money
You've just accepted a new dream job and plan on rolling over the 401(k) money you amassed at your previous job. What's the most efficient way to do that? And should you?
If your new 401(k) has limited choices, you may want to roll the money into a traditional IRA or a Roth IRA, McFarland said. That will give you more investment options.
If not, you can roll the money into your new qualified plan, but remember there may be a waiting period that prevents you from contributing pre-tax dollars and getting the company match.
Either way, make sure your previous employer writes the rollover check to your new qualified plan and NOT to you directly because the government will withhold 20 percent of the distribution and that money will be taxed as income.
"I really think the most import thing is the company match," said Karen Spiro, a certified financial planner from Cleveland, Ohio. "But also the choices one has are really important. If there's matching though, even if the choices aren't great, it's still a good thing to participate." 
|
|
|
|
|
 |
|
