Are You
Taking Advantage of Your 401k?
Are you taking advantage of your 401k plan? If not, you
are passing up free money. I was shocked when I recently read that nearly 33%
of American employees do not take advantage of their employer sponsored plan.
So, why participate in your companies 401k plan? Here are several reasons why
you should take advantage of this investment plan:
Employer Matching Contributions - Many employers
match a percentage, or even all, of employee contributions. This is where
the free money comes in. If you earn $40,000 a year, and are putting 5% into
your 401k, you are personally investing $2,000 a year. Now, if your employee
matches just 50% of your contributions that's an extra $1000 a year you are
earning! You've automatically gained a 2% raise! Or, you could look at it as
automatically earning a 50% return on your investments, a dividend that even
Warren Buffet would covet!
It is recommended that you
put as much as possible into your 401k, or at least as much as your employer
is willing to match.
Tax Deferred Earnings - Not
only are you putting money away towards retirements, you are doing it
without first paying taxes on the money! By taking advantage of the
tax-deferment, you can put more into your 401k now and you don't have to pay
the taxes on it until it is withdrawn.
Investment
Earnings - Not only do you save money on your taxes, and get your
employee to boost your retirement fund, but you are also earning investment
income on all that money as well. Over time, your small investment now is
likely to pay off many times over down the road.
Why not? Why wouldn't everyone take advantage of this
opportunity? Here are a few of the excuses that we've heard:
Can't afford to - Some employees feel that they
can't do without that small percentage of extra income. They are living
paycheck to paycheck as it is and, if they have to do without another 5-10%
it could mean disaster.
Afraid of Investing -
Another reason I occasionally hear is that people are aware of investing.
They've heard horror stories of people near retirement have lost much of
their nest egg during the dotcom disaster a few years ago and are fearful of
doing the same. Never mind that the stock markets continually goes through
its ups and downs but has, over the years, traditionally been the best
source of investment potential around.
Afraid of
Early Withdrawal - Some people are worried that they will have to pay
stiff penalties if they need to close out the account for some reason, or if
they decide to switch jobs and can no longer participate in their current
plan. While yes, there are some pretty stiff penalties and taxes for early
withdrawal, these can definitely be avoided.
Through
proper budgeting and saving, hopefully the
first excuse can be avoided or, at the very least, minimized. And, as far as
going to a different job, you can typically
roll-over your existing 401k into the new employers plan or into an
self-directed IRA. By doing either of these, you don't lose a dime.
