Retirement plan decisions made easy
Lesson 2: Contributions to Your 401k
One of the best ways to save for retirement is a 401k plan. It’s so good that, even if you have to give up some luxuries, it’s worthwhile to contribute a large amount. The benefits are numerous. Although some questions arise regarding “how much” and “when,” the main point remains the same: Contribute as much as you can to your 401k and you’ll be thankful in the future.
Money flows into that box from a person’s employer; the funds are set aside from the employee’s wage based upon his 401k decisions. In most cases, the employee chooses the investments into which that money will flow, but not every payday-what a bother that would be. But the employee does choose how new money will be invested.
Drill Down: Making the Roth or Regular Decision
The tax advantages change the arithmetic of a 401k deduction. To put $100 a month into your regular 401k will only cost you $70 if you’re in the 30 percent tax bracket, counting both federal and state taxes. Unfortunately, even though you do get a withholding tax break, you will not escape Social Security and Medicare taxes on the money you put into your 401k.
Drill Down: Saving for Retirement Costs Less Than You Think
Low income families (joint tax returns with less than $52,000 of income) may qualify for the Retirement Savings Contribution Credit, which nicely reduces the net cost of funding your 401k.
Drill Down: More about the Retirement Savings Contribution Credit
How much should you contribute? The answer depends upon whether an employer match is offered or not. If your employer offers a match, contribute at least as much as your employer will match. If your employer will match 50 cents on the dollar for your contributions up to six percent of your pay, then contribute six percent. If your employer will match your contribution dollar for dollar, up to three percent of your pay, then contribute at least three percent. The issue of a vesting period can make this a bit more involved decision, but the logic is simple: If your employer is offering you extra money, take it.
Drill Down: Contributions When Your Employer Offers a Match
If your employer does not offer a match, and contributions over the amount that your employer will match, your decision is a little harder. In general, I favor contributing to a 401k as soon as possible. It will not get any easier in the future, because you would need to save a larger amount to reach your retirement goal. Dollars you save today will have more time to grow than the dollars you save a year from now, so if you start now, you’ll be able to reach your goal with a smaller amount per year than if you waited.
Drill Down: Contribute to a 401k or Pay Off Credit Cards?
Drill Down: Contribute to a 401k or Pay Off the Car Loan?
Drill Down: Contribute to a 401k or Pay Down Your Mortgage?
Drill Down: Contribute to a 401k or Build Up a Savings Account?
Drill Down: Contribute to a 401k or Build Up a College Savings Account?
If money is really, really tight, start with a minimal contribution now. Then every time you get a pay raise, put all of the raise into your 401k. In a few years, you should be saving a fair amount.
Drill Down: The Gradual Option for Building a 401k
When and how much to fund your 401k are some of the most important decisions you can make, and this will help you make an informed financial choice.
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
» Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
Lesson 9: Your 401k, Your Other Assets, and Your Life
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