401k
 

Since I am now eligible for the 401k plan at work, can anyone explain to me what exactly it is? and what it does? I have a huge pile of paper from Merrill Lynch and am slowly reading through it, but I don't really have much of an idea of what a 401k is, and what I do with it.

Is it worth me getting one sorted? Are there any other better options around for savings? Should I just set up my own savings account and dump an amount into it every month instead?

Thanks.

Re: 401k
 

A 401k is a tax qualified (you don't pay income tax on it) retirement account.
it is good if your company matches a certain percent of the money you put in.

If they do not, then a Roth IRA is the way to go.

Re: 401k
 

Its basically a pension plan. Does your work match anything? mine matches whatever i put in up to 6% of my salary so i put that in each paycheck because otherwise its free money that you arent getting. its definately worthwhile...i dont really pay much attention to it and i checked mine a few months back and i have over $20k in it after only 4 years.

If they dont match it, like my husbands job doesnt, i dont know that its so great because the money is stuck in there and you cant get it out without penalties until you are 60 i believe so if that is the case it may be better just to put it into a savings account. I dont know if there are tax breaks or anything associated with it though.

Re: 401k
 

definately not a savings account

Roth IRA
Mutual Funds

Re: 401k
 

Try this for some basic info. It get it's name from the IRS tax code, which is why it sounds so odd.

http://en.wikipedia.org/wiki/401k

As the others say, it's a good idea to contribute if your company matches your contributions, as that's easy retirement money. My husband puts in 6% of his salary and his company matches 40% or so of that. It's pre-tax.

If they don't match, then look at a Roth (not savings).

The biggest challenge is picking an option, when presented with so many. Most plans allow the individual to choose the option they want--do you want very safe, a bit risky, high growth, etc. Find a friend or advisor who can help walk you through it, if you're unsure.

There are big penalties for borrowing or taking the money early--don't do it. If you don't plan to stay in the US for a long time then you may want to look at other options.

Re: 401k
 

The 401K takes the place of the old "traditional pension plan." It is portable, and can go with you from company to company, until you are retirement age. If your company gives a match of say 6%, that is free money. What they match, and what you put in, is tax free (until retirement age), when you would be in a lower tax bracket. Therefore, you are making interest on money that would have been taxed on, and this would put you into a lower tax bracket at the end of the year. If you don't participate, you lose the "free money" from your company, and don't lower your tax bracket.

You can make loans on the money, after a certain time.

If you take the money out before 59-1/2 (except for some exclusions), you will pay a 10% penalty off the top, and have to pay the whole amount of deferred tax in the year you take it out.

If you change companies, it can be rolled over into the new company's plan, with no penalty, until 59-1/2.

If you went with a company with no 401K, you could leave it in the old plan, or roll it into a traditional IRA.

Re: 401k
 

Thanks for all the replies, will try and speak to someone at work who knows a bit about it. The company match 50% of what I put in up to 6% so could definitely be worthwhile, especially as I have over 30 years left to use it.

Re: 401k
 

Most will also allow you to invest in managed funds, where the 401k company will invest it into sub funds on your level of risk. Personally I like to manage mine myself.

Re: 401k
 

This is a potential way to invest for retirement in terms of prioritizing plans

1. Employer plan with a match
If your employer matches your contributions to the company's defined contribution plan -- e.g., 401(k) or 403(b) -- this should be the first place to devote every dollar that you can afford to lock away for the long term. Why? You're staring at free money, and you shouldn't just stare at free money -- you should take it.
Other advantages of an employer-sponsored plan:

Tax deduction: The money you contribute to the employer plan is not included in your income for tax purposes.
Tax-deferral: You don't pay taxes until you retire. That leaves more of your money to grow through the years.
Automatic investment: The money is transferred directly from your paycheck to your account. No checks to write, no monthly reminders, no paper cuts to the tongue while sealing the envelope.
The contribution limits vary from plan to plan, but generally the limits are:

2005: $14,000
2006: $15,000
In 2007 and thereafter, the $15,000 limit will increase in $500 increments whenever the cumulative effects of inflation indicate such an increase is needed.

In addition to the normal contribution limits outlined above, those over the age of 50 can make an additional "catch-up" contribution in the following amounts:

2005: $4,000
2006: $5,000
In 2007 and thereafter, the $5,000 "catch-up" limit will increase in $500 increments whenever the cumulative effects of inflation indicate such an increase is needed.

Making your employer's plan the first stop applies only to those dollars you defer that are joined by matching dollars in your account. Check your plan. For instance, if the employer offers a match only up to the first $3,000 that you contribute annually, but you're contributing $5,000, those 2,000 unmatched dollars might well be put to even better use -- namely, a...

2. Roth IRA
The next place to turn after you've taken full advantage of the company match (i.e., free money) is a Roth IRA, as long as you qualify. (Your ability to contribute to a Roth begins to phase out at a modified adjusted gross income of $95,000 for single filers and $150,000 for joint filers, reaching the ineligible stage at $110,000 and $160,000, respectively.) Why a Roth?
Tax-free growth: While you won't get a tax deduction on contributions to a Roth IRA, you'll never have to pay taxes on the earnings when you begin withdrawals (assuming you follow the rules).
More control: If you open your account with a discount broker, you can purchase individual stocks, bonds, and any index investment offered through that broker. This is an advantage over the limited selection offered by most employer-sponsored plans.
No mandatory distributions: With employer-sponsored plans and traditional IRAs, you must begin withdrawing funds by April of the year following the year in which you reach age 70 1/2, even if you don't need the money. Not so with a Roth. If you don't need the money, it can keep growing on its merry, tax-free way.
The contribution limit for a Roth (and traditional IRA as well) is $4,000 for 2005 through 2007, and $5,000 for 2008. Thereafter, the $5,000 maximum allowable contribution will be indexed to inflation in $500 increments.

3. Employer plan
We still like defined contribution plans (like 401(k)s and 403(b)s) for your retirement savings even after you've reached the matching limit. The money that you contribute to the plan comes regularly out of your paycheck without you having to do anything at all, and you're getting that tax deduction by contributing pre-tax money. Again, the contribution limits vary from plan to plan, but generally the limits are $14,000 for 2005, $15,000 for 2006 and an amount indexed to inflation in 2007 and beyond.
However, the investment options in your plan might not be that great. If you're staring at a bunch of underperforming managed mutual funds as your only choices, you might want your money going to better accounts. Each month in our Rule Your Retirement service we take a detailed look at what qualifies as a "good" investment for the long-term.

4. Traditional IRA
If your income level is too high for you to start or to continue contributing to a Roth IRA, you can nonetheless make a contribution to a traditional IRA. The contribution limits are the same as for the Roth, and those limits apply to total annual IRA contributions; in other words, you can't contribute $4,000 to a Roth and $4,000 to a traditional IRA (at least until contribution limits reach $8,000 a year).
A traditional IRA grows tax-deferred and is taxed as ordinary income upon withdrawal. Plus, contributions are tax-deductible if 1) your employer doesn't offer a retirement plan, or 2) you are single and your adjusted gross income is below a certain level. Those levels change every year, so check with the IRS. For 2005, for example, the limit is $50,000 (gradually phased out until $60,000) for single tax filers or $70,000 (gradually phased out until $80,000) for married filers.

Re: 401k
 

I never had a 401 but did have a 501 silver hatchback is that better?

Re: 401k
 

Bottom line without being too long winded

Reduces your taxable income at the end of the year

i.e

If you earn $50K and put in 10% before tax you will be taxed on a gross income of $45K not $50K.

The company is matching in addition to the growth in stocks or mutual funds - so you really can't lose unless there is an enormous crash, with 30 years left to work you have time to ride a couple of crashes.

The 401 K can be rolled over if you leave your present company into another companies 401K, Roth or IRA

You can sometimes get a loan against what you have in the 401K if you do ever get tight for money, the caveat is that there are substantial penalties for early withdrawal.

You really can't lose - put as much as you can in up to the maximum allowable.

Re: 401k
 

Thing to look out for, depending on how old you are, are the implications if you have to cash out before retirement, you then pay tax on it, and it's a hefty sum....and see how you can claim it if you leave the job, or bugger off abroad...

But yeah, if your company matches, it's worth it, I dump 2% in, and my company apparently matches up to $10-15K a yeah depending on if your a phleb or senior, they didn't have a cap till this year, but then you also had to have worked here for a year to get it, but they dropped that down to 30 days after all the recent hires.

Re: 401k
 

speaking of which - Mutual Funds - know of any good ones? I'm considering rolling my 401K from my old job over into one.


btw I'm pretty clueless about it all

Re: 401k
 

Enron?
United Airlines?
Tyco?

Re: 401k
 

If that means you want to put it away and more or less forget it, there are funds that have target dates for payout. Young people should have more adventurous investments, while older people should be more conservative.
Several companies have funds that make these adjustments. Fidelity has info on these "Life cycle funds": http://personal.fidelity.com/research/funds/?bar=c