If you’re like many employed Americans, you probably have a 401(k) plan. Everybody knows they should be putting money into their 401(k) plan to prepare for retirement, but actually doing so can be a bit of a challenge. Money is tight for everyone and the idea of putting money into the stock market seems like a pretty risky bet. If this describes you, you’re not alone.
If you have a 401(k) available to you it’s still one of the best and easiest ways to put money away for retirement. It’s easy because it’s done at the payroll level, meaning you don’t have to worry about making deposits or calculating tax deductions at the end of the year. It’s beneficial because it significantly reduces your current taxable income and grows tax-deferred. If you think getting a tax refund is great, consider this. At the 25% tax rate, every $1,000 you put away for retirement, you will pay about $250 less in federal taxes. It’s still your money, but instead of directing it into your bank account you’re just tucking it away in an account earmarked for retirement but paying fewer taxes in the process.
More Than the Stock Market
The biggest objection I hear from people is that they don’t want to put money into their 401(k) because they don’t trust the stock market. To be honest, that’s a pretty lame excuse. That’s because virtually every 401(k) out there gives you a variety of investment choices, some of which have nothing to do with stocks. From money markets to bonds, you’ll almost always have an option to invest your money somewhere that doesn’t involve stocks if you choose to do so.
So, don’t use the recent stock market volatility as an excuse to not save for retirement. You can probably still put money away into a 100% guaranteed fund if you want. Dust off your 401(k) investment options brochure and look at what’s available to you if you have some reservations about putting money into your 401(k).
Don’t be Afraid of Withdrawal Restrictions
After complaining about the stock market the next thing I usually hear is something to do with how the money is tied up. It’s true that the money isn’t going to be as easy to get your hands on as the money you have in a savings account, but it’s not supposed to be easy. If people could tap into their retirement funds with an ATM card, nobody would ever be able to retire.
That being said, the restrictions aren’t all that bad and your money isn’t locked up forever. Money can generally be withdrawn from a 401(k) on six different occasions:
- Termination of employment
- Reaching age 59 ½ (or 55 in some cases)
Usually, when you find yourself in a position that forces you to look towards your retirement plan for money, it’s one of these reasons. Sure, you might be bummed to learn that you can’t dip into it whenever you want to buy a new car or take a long vacation, but that’s what your other savings accounts are for.
Finally, there’s often the ability to take a 401(k) loan. More than 65 percent of all plans have a loan provision, so you have one more way to access your money if you really need it. While you still don’t want to tap into retirement savings if you don’t have to, a loan is usually a better option than a straight distribution because you aren’t assessed a penalty (as long as it’s paid back) and you actually put money back into the account to repay the loan.
Taking Advantage of Your 401(k) in 2011
As the new year approaches, you should consider how to take advantage of your company’s 401(k) in 2011 if you have one. If they offer a match, it’s a no-brainer and you should contribute enough to at least get the match. That’s free money and in most cases it’s like getting an instant 50 or 100 percent return on your money. Even if they don’t have an employer match it’s still a good idea to save. You’ll only help build your nest egg while receiving some tax breaks in the process. For most people, the contribution limit should be $16,500 with a $5,500 catch-up provision for those over 50. This is a generous limit considering the annual IRA contribution is just $5,000.