Investment & Financial Articles
Title: Funding Your Retirement: The 401K and 403B Way
Author: MomsBudget
Article:
Saving for your retirement doesn't have to be a nightmare as
long as you are aware of your options. For now, we're focusing
on 401K and 403B retirement plans. These two plans are
essentially the same except that for-profit companies use 401Ks
and non-profit companies, such as the government, use 403Bs.
An employee contributes to a 401K plan with pretax salary. This
means that this account appreciates without taxation until you
retire or leave the company. So, 401K contributions are not
included in your reported income.
In essence, you receive an immediate tax deduction for your
contribution.
Many employees offer an automatic payroll deduction, so there
isn't any extra effort involved for you. Matching contributions
or partial matching contributions are other incentives offered
by employers. For instance, my employer matches every one of my
dollars with a quarter. Sounds like small potatoes, but remember
the beauty of compound interest.
Of course, there are rules and regulations. You are typically
limited to a percentage of your income or $10,500 annually,
whichever is less. So what happens if you leave your company?
You have 3 options: leave it as it is, roll it over into another
tax-deferred retirement account such as an IRA or withdraw it
all. However, early withdrawal penalties, that is before age
59-1/2, are stiff. Usually, it's a 10% penalty plus any taxes
owed. So, if at all possible avoid withdrawing any funds before
age 59-1/2.
Your 401K portfolio should be chosen carefully, weighing age and
risk factors. The older you are, the less stock you should have
in your portfolio. Many financial advisors suggest that your
portfolio percentage of stocks should be your age subtracted
from 100. Therefore, a 25-year-old' s portfolio should consist
of 75% stocks. However, if you're not comfortable with that
level of risk, then simply chose fewer stocks. Do remember this:
over the last century the stock market has returned an average
of 11% (this includes all wars and the Great Depression). Your
plan will most likely offer 4 to 7 investment options of mutual
funds, stocks, bonds, etc. for your portfolio. My company
provides 10 options of which I have chosen 5.
Chose wisely and consider how much risk you are willing to take.
Most of all, you need to be comfortable with your choices. If
you need further assistance in choosing your investment options,
check out www.morningstar.com or the MorningStar books at your
local library.
About the author:
MomsBudget.com - Providing financial resources for women who
happen to be mothers. Sign up for our newsletter by sending an
e-mail to momsbudget-subscribe@topica.com
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