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The benefits and pitfalls of investing in your company's plan.
It may be hard to believe, but 401(k) plans have existed for about 20 years now, just long enough for the first participants to begin funding their retirement. These pioneers are now reaping the rewards of retirement planning, but have also learned some of the pitfalls of 401(k) investing. What follows is a short list of the dos and don'ts of 401(k) plans. This list is not comprehensive, and you should consult your investment professional for further advice.
Do participate. Approximately 200,000 employers offer 401(k) plans to their employees. In most of these plans, employers match a portion of the employees' contributions - which translates into free money for the investor. A 401(k) plan also shelters the investment from taxes until the money is withdrawn.
Don't forget your spouse. You should invest as much as possible in your 401(k) plan. Typically you can invest as much as 15% of your annual income, or a maximum of $10,500 per year. When deciding how much to invest, you should consider what 401(k) benefits and options your spouse may have. If he or she has more investment options or a greater employer match, it may be better to invest a larger percentage of his or her income.
Do diversify. Most 401(k) plans have several different investment vehicles in which to allocate your contributions. Consider your 401(k) plan part of your overall portfolio and invest accordingly.
Don't borrow from your 401(k). When you borrow from your 401(k), you reduce the amount of money that is compounding, tax-deferred, for your retirement. If you were to borrow using a home equity loan, you would most likely be able to deduct the interest you paid from your taxes. Interest paid back to a 401(k) is not tax-deductible.
Do reallocate. Your investment needs will change as you age. You will want to allocate your assets differently when you are in your twenties than when you are in your forties or fifties. Also, review your 401(k) allocation when you undergo major life-changing events such as marriage or having a child.
Don't wing it. Investing in your 401(k) is serious business. Talk to a professional about what investment strategies are right for you. It could be the difference between retiring at age 50 or 65.
While 401(k) plans are rapidly becoming one of the most popular ways to save, they are not the only way to invest for retirement. Plans like Individual Retirement Accounts and annuities are two other alternatives. Talk to your financial consultant about what methods may be right for you. PR