401(k) and 403(b)
By far the most common company-sponsored defined contribution plan is the 401(k). If you work for a school system or certain other nonprofits, you may be eligible to participate in an analogous plan, the 403(b). The information here is specific to the 401(k). As previously described, a 401(k) permits you to contribute pre-tax dollars to your company-sponsored plan. Collectively these monies may be invested in company stock, stock and bond mutual funds, money market accounts, and fixed accounts.
The collapse of Enron was a devastating event for its investors and employees who lost their jobs. Perhaps the most frightening thing about the scandal was seeing people's entire retirement savings evaporate with the plummeting value of Enron stock. Too many employees had all or most of their retirement savings in Enron shares. The lesson: Diversify retirement investments.
401(k) plans are justifiably popular because of the feature of employer contributions to these funds. Generally, you will be required to make contributions that the employer may match. The matching won't necessarily be dollar for dollar, and it may have a cap. No matter. If you do not pony up whatever is required for you to take advantage of the employer's contribution, you might as well start ripping up money and let it flutter out the window. It is crazy not to take advantage of money being offered to you — for free! Even if your company does not offer matching funds, there are many advantages to using a 401(k), which may include:
Tax reduction — you may actually take home a bigger net paycheck by putting some pre-tax dollars aside
Mobility — your 401(k) can follow you from employer to employer
Self-directed investment choices
Higher contribution limits than an IRA
Ability to save in both an IRA and a 401(k)
Can borrow from the balance
Access to monies before retirement for hardship or other reasons
Can defer minimum required distributions beyond age 70½ if still working
Compounded growth occurs tax-deferred for life of fund until distributions begin
Many people wonder if they can write a check to make a contribution to their 401(k). The answer to that question is no. The government has structured these as payroll deduction plans. There are dollar thresholds on how much can be applied to a 401(k). If you are below the threshold, you can opt to increase your payroll deduction.
Once you establish a figure you can afford to put aside each month, or year, for your retirement, put one of these plans on the top of your list of where to place your dollars.
