Longer life spans, more active retirements, rising costs and uncertainty
over Social Security make the need for a substantial retirement nest-egg
greater than ever. Luckily, many corporate retirement plans offer employees
control over building that nest egg.
Benefits of 401(k) Plans
Convenient Saving. Contributions each pay period make it
easier to accumulate significant amounts over time.
Employer Contributions. In most plans, the employer also
"matches" some portion of the employee amount each period. Some
employers also make contributions based on financial results.
Tax Deferral. Employees are not taxed on the portion of
their wages they contribute. Funds in a 401(k) plan are not taxed until
withdrawn.
Investment Flexibility. Plans often provide extensive
investment options including mutual funds, company stock and other fixed
income choices.
Making the most of your 401(k) plan
Retirement plan benefits will probably be one of your greatest sources of
retirement income. Getting the maximum benefit from your plan is simple.
1. Participate in the plan. As simple as this sounds, some
studies have found that many choose not to participate. Even minimal
participation makes sense.
2. Contribute as much as you can. Your plan may have
limits on the portion of your wages you may contribute. The annual limit
employee contributions has been increased to $14,000 for 2005 under the new
tax law. In addition, a catch-up provision was added that enables
participants age 50 or higher to make an additional contribution of up to
$4000 for 2005. Determine what you can afford and make the largest
contribution you can.
3. Get the entire employer's match. Review your plan to
understand how the employer's contributions are made and allocated. Your
Human Resources department should be able to help you.
4. Use a sensible investment strategy. Choose a
combination of investment options that match your time horizon and risk
tolerance. Generally, the longer time horizons and greater risk tolerance
dictate a more aggressive investment strategy with greater use of equity
investment choices.
Include your retirement plan in your financial planning. Your retirement
plan should be an integral part of your overall financial strategy. Make sure
you consider it as you design and implement an overall financial strategy.
