By all means . . . participate! If your company offers a 401(k) plan and you are not participating, then you are missing out on the most basic way to have a nice nest egg when you get ready to retire. Moreover, once you begin to contribute, and you get used to missing the little bit of money the plan takes each pay check you’ll end up asking yourself, “Why didn’t I participate earlier?”
I currently work for one of the largest financial and investment companies in the world. I work directly with clients setting up their 401(k) plans, educating clients on investment options, and going over the rules of the plans with the client. I am licensed in the investment and securities industry on variable investments, open-end investments, primary offers in closed-end investments, and 401(k) retirement options. I talk with anywhere between 80 to 100 people every day, five days a week, working with these people directly on their 401(k) plans. Therefore, I can tell you first hand that most (and I do mean most) people have no clue as to how their 401(k) plan works, or how they can get the most out of their 401(k) plan. This fact is what has actually inspired me to create The Working Dollar blog.
Because of this, for the next few weeks I am beginning a very extensive and very detailed series on how to get the most from your 401(k) plans. To most regular everyday average employees, 401(k) plans cause them to become like a deer staring into headlights. I constantly hear “I have no idea how this things works?” “What do I invest in?” “I need serious help because I have no idea what I’m doing”, “This thing is too confusing, I’ll never learn how to make it work.”
Do not let the false impression that a 401(k) is complicated keep you from participating in the plan. In all fairness, 401(k) plans are not that complicated at all if you take a little bit of time to understand how they work. Very simply put, a 401(k) plans has five essential elements that if understood, every participant can easily know how to maximize their 401(k) plans. These five essential elements are:
- Contributions
- Company Match
- Distribution Options
- Investment Options
- Taxes
If you can get a grasp of the above five elements in your 401(k) plan then you can easily maximize your plan and make your money begin to work for you. To this end I will begin this series on getting the most out of your 401(k) plans. I will provide details for all the essential elements. Moreover, I’ll post subsequent articles about various other topics pertaining to your 401(k) plan such as, “If I leave my company, what should I do with my 401(k) pan,” “How can I change my investment options in my 401(k),” “What do I do with my 401(k) once I retire?” and much more.
Keep in mind that I will educate you, the reader, on your 401(k) plans. I am not telling you how you should invest, what you should invest in, or giving any advice on how you should actually work or treat your 401(k) plans; ultimately, all that is up to you. My goal here is to help you gain a better understanding of what a 401(k) plan is, and how it can be best utilized by understanding the basic principles of the 401(k) itself. To that end, I hope you enjoy this series.
2 comments:
My company offers a 401(k), but the match is crappy and I have to wait for the crappy match to be vested.
According to HR, "We will continue to match your 401K contributions, but we are now going to be matching 20% of each dollar contribution up to 5% of your pay." At the end of one year, 20% of the match will be vested. It takes five years to be fully vested.
I hate this job, and I'm really hoping to not even be here a year. Right now I'm investing 12% of my paycheck into the 401(k), but I'm thinking about scaling that down to 5% (to get the match, just in case I do end up staying here longer than I expect) and funneling the rest into a Roth. Is that a good idea? Any other suggestions for me?
Jess,
Sorry to hear about the "crappy" job, I know from first hand experience that can be miserable.
The fact that you are contributing 12% regardless of how long you stay at your job can only help the account grow faster over time.
If and when you leave the company, your best option is to not cash out on your 401k, 'cause you will be taxed 20% off the top when you withdraw the money, and, if you are younger than 59 and 1/2 you'll be tagged with a penalty of an additional 10% when you file your taxes.
Keep in mind that your 401(k) is "pre-tax" dollars, so if you move it to a Roth, you will be taxed on the 401(k) money, since a Roth is after-tax (already been taxed). To avoid this, roll the money into another employer sponsored 401(k) plan, or open up a traditional/rollover IRA (which is also a pre-tax account).
Also, do not let the poor company match keep you from contributing higher, the more you contribute the more you'll have when it comes time to retire. Hope that helps, and good luck in your future.
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