401k PLANS
Kim Husbands is a 33-year-old resident of Queens, New York. She makes a little under $30,000 per year, and, like most of us, lives paycheck to paycheck. Not wanting to grow old regretting that she didn't plan ahead, she has put $500 towards a 401k plan. Kim has asked us for advice on the best way to invest her 401k money.
THAT MONEY SHOW teamed up with Gary Schatsky, a financial planner and president of Objectiveadvice.com, to tackle Kim's question. Gary and THAT MONEY SHOW have the following tips on 401k investments.
What are the benefits of a 401k plan (known as a 403b if you work for a non-profit)? 401k plans are a great vehicle for retirement planning. Your deposits to the account are tax deductible. So for every dollar you put in, it really doesn't cost you a dollar, as there are tax savings. And well-managed plans, where your money is invested wisely, are going to be making money for you over the years.
The first thing to find out is what your company offers. Once you know that your company has a plan you need to find out when you can enroll, as there may be a delay of up to a year before you can join. You also need to find out if your company will match any of your contributions. Some will match a certain percentage of any contribution you make, and this is essentially free money.
You need to see what investment packages your company has available. Many will offer several funds to choose from. The key is balance, and not just in your 401k. The ideal fund is diverse and will have some stocks, some bonds, shares in international companies, and investments in companies of large and small sizes. However, make sure you consider your 401k in relationship to any other assets or investments and make sure that your entire portfolio is balanced.
Delay taking money out of your 401k. When you put money in, it is tax deductible, so if you take it out before retirement you have to pay tax on it and pay an additional tax penalty of ten percent. There are only a few special circumstances under which you can access the money without severe penalties, so don't withdraw on it to go on vacation. 401k plans are designed for retirement. If you keep the money in, it will keep earning you money, tax deferred. If you try to turn it over quickly, you are most likely in for a loss. The same goes for changing jobs. See if your new company offers a 401k plan as well. Ideally, you will be able to transfer funds from your old 401k plan to a new one. Avoid taking the money out.
401k plans can be a great source of security for retirement. However, the returns are not guaranteed, so it's up to you to stay informed. Be an informed consumer, and make sure you know as much as possible about 401k plans before you invest.
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