Image: ? nanette | Morguefile.com
401k, IRA, Roth IRA, Mutual fund, stocks, bonds? what are they and how do they differ?
We all know that we should be planning and saving for retirement. Your company might offer a 401k plan with matching funds. Or? perhaps you received a letter from the financial planning department of your bank, offering to help you set up an IRA (Individual Retirement Account). Or maybe you?re tempted to buy Facebook stock now that the price has gone down. Before you make decisions about how to invest your money, get all of the facts so that you can make educated choices.
What?s a 401k?
A 401k is an investment account offered by your employer. It is named for the IRS code that applies to it. You choose the amount of money you want to contribute out of each paycheck (a percentage, often in increments of 1). Your employer withholds that money from your paycheck before calculating the taxes you owe . That means you?ll pay lower income taxes this year. You decide how the money is invested, and you don?t pay any taxes on the money or its earnings until you withdraw it. When you are ready to start withdrawing the money, you?ll likely be in a lower tax bracket than you are now.
Employer Matching
One popular feature of 401k accounts is that many employers offer matching contributions ? if you contribute to your account, your employer does, too. For example, if your company offers a 3% match, that means that if you contribute 3% of your salary, your employer will contribute an equal amount and you?ll end up saving 6% of your salary toward retirement. But it only costs you half that amount to do so! A ?match? is just that ? a match. If you don?t contribute, neither will the employer. In other words, you can choose to contribute a lower amount, but that is also the amount the employer will contribute and you lose out on free money. Under most circumstances, it doesn?t make good financial sense to contribute less than the amount of the match that is available to you. Match or no match, you should contribute as much as possible. You can contribute up to $17,000 in 2012. If you?re 50 or older, you can also make catch-up contributions of up to $5,500. The money your employer contributes does not count against these limits.
Investment Options
Most 401k plans are participant-directed. You choose from several investment options ? usually a variety of mutual funds. The funds carry varying levels of risk depending on the mix of investments within the fund. Having more money in stocks is generally associated with higher risk, and having more money in bonds is associated with lower risk. Younger workers are encouraged to take on more risk, as they have more years before retirement and can ride out fluctuations in the stock market. Higher risk is often associated with higher earnings in the long run. If you are closer to retirement, most advisors suggest a lower-risk investment strategy because you don?t want to experience a big loss right before it?s time to start withdrawing the money. All investments carry some risk and no 401k account is guaranteed to grow. In a participant-directed plan you can change your investment choices at any time, but it?s wise to leave the money alone for at least a few years once you choose investments that fit your retirement goals. Ups and downs are normal and should be expected. In any case, experts are available to you to explain the different fund choices and help you figure out which one is right for you. Contact your 401k?s administrator.
Job Changes & Vesting Schedules
You don?t lose your 401k when you change jobs. The money you contribute is always yours. Sometimes you can leave it in your former employer?s plan. Other times you?ll be required to move it to a new plan. The money just has to be in a qualifying retirement account if you want to avoid paying any penalties. When you transfer the money to a qualifying account, it?s called a rollover and again, the taxes are deferred. If you leave the company, you might not be able to keep all of the funds that your employer contributed to your account. It depends on your company?s vesting schedule. Vesting simply means that you have to be with the company for a certain amount of time before you get to keep all of the money the company contributes to your retirement account. Vesting schedules are often 3- to 6- years. Here?s an example:
Your company might have a 5-year vesting schedule that allows you to increase your ownership of the money by 20% each year. If you leave the company after 4 years, you would be allowed to keep 80% of the employer?s contributions to your account (and 100% of your own contributions). If you stay with the company for 5 years, all of the money is yours. And once you are fully vested, all future contributions are 100% yours.
If you need to, you can borrow against your 401k. Don?t withdraw the money before you?re 59? years old, though. If you do, you?ll pay a substantial penalty.
The bottom line is that if your company offers a 401k plan, participate. And, at a minimum, contribute the amount that will get you the maximum matching funds.
?
Kimberly Rotter?is a writer, businesswoman and mother in San Diego, CA. She holds a Bachelor?s degree in English, a Master?s degree in Business Administration, and a Graduate Certificate in Distance Education. Kim and her husband own two homes, a couple of vehicles and a few investments, and live with minimal debt. Both are successfully self-employed, each in their own field. Related Stories:
?
la riots new jersey devils torn acl derrick rose injury st louis news utah jazz lawrence of arabia
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.