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401(k) PLANS

Don’t depend on matching contributions

>> If you’re on one of those lucky people whose employer still matches their 401(k) contribution, prepare for a potential hit. Dozens of big companies, desperate for cash, have already stopped or reduced their contributions. They include Eastman Kodak, Motorola, Federal Express, Inter-Mountain Health Care, and (no surprise) GM, and Ford. Coming on top of plummeting stock and bond values, this trend significantly weakens the retirement plans of millions of Americans. Those affected may have to work more years and retire with less money.

Self-defense: Consider putting every cent you can into your 401(k). Even if your company has reduced or eliminated its contribution, a 401(k) is still an excellent way to build assets for your future. Here’s why:

  1. The amount you contribute is tax-deductible. That puts you ahead in two ways: You don’t pay federal income tax on the money that goes into your account, so 100 percent of your money can grow to increase your nest egg. And depending on your tax bracket, the tax saving liberates money you would otherwise have paid to the IRS.
  2. The accumulated earnings in your plan are tax-deferred. That means you can postpone taxes on both the income and capital gains earned by your plan. You will have to pay taxes when you withdraw from the plan, after you retire. But at that point, you’ll probably be in a lower tax bracket.
  3. Your employer’s contributions to your plan, if any, are also tax-deferred. Which means they earn the investment return on your portfolio without current taxes.
  4. As the cost of living increases, so do the limits on contributions to your plan. In 2009, the limits are $16,500 if you’re 49 or under, and $22,000 if you’re 50 or over. No question that it’s hard to take that much money out of your income. But just the sheer arithmetic is so much in your favor, it’s a shame not to do it.

Another important issue is what investments to choose from those available in your plan. It’s no secret that the editors of FinancialThreats.com favor broad-based index funds, like an S&P 500 index fund. These funds offer diversity, low costs, and freedom from error by investment managers. These days, the last point alone has emerged as compelling reason to prefer index funds. Stay tuned to this site for more on how to choose investments for your 401(k).

How Stuff Works is one of the best sites to learn about 401(k) plans.

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The 3 big reasons to invest in a 401(k) plan.

 

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Copyright © 2009 Richard Evans and Andrew Bromberg