Don’t Rely on Your Pension Alone

Events in recent years involving businesses such as Enron and WorldCom have people concerned about establishing pension accounts with their employers. You can hardly blame them, either. Employees around the country are being told, “Don’t rely on your pension alone” when it comes time to retire.

While the chances of every business in the United States being dishonest and bilking their employees out of their hard-earned pension are slim, Enron and WorldCom are examples that it can happen. If you are concerned about the prospects, the solution is to have more control over the funds that you set aside for retirement, and where they are placed.

As a general rule, 401(k) plans are a safe place to save money. Your employer will deposit pre-taxed money into an account and will usually match a portion of your contribution. You should be able to decide where the money is placed, and in which proportions. If you are concerned that things aren’t right, your employer should have given you a telephone number for you to contact concerning your account.

It is unlikely, however, that even if you saved the maximum allowable contributions you would have enough money saved to cover the entire length of your retirement. It is for this reason that diversification is a good idea, especially when it comes to retirement funding.

There are several options to choose from when saving for retirement:

• Personal retirement accounts
• Roth Individual Retirement Accounts
• Money market funds
• Stocks and bonds

You may or may not have funding from Social Security, so you’ll want to consider some of these other options when planning your retirement nest egg.

One thing you can control, much more than the amount of money you could earn from the stock market, is what you are currently spending. If you choose to live below your means, and saving what you don’t spend, you can put that extra money toward IRAs or other stable savings plans.

There are even retirement plans for those who are self-employed. Keogh plans can be opened at any bank, credit union, or brokerage firm but have certain limitations. Check with a financial planner, financial counselor, or certified public accountant to get the rules for saving contributions for your state. Individuals may also set up individual retirement accounts, either traditional or Roth.

No matter where you place your money, you want it to grow for you. Having more than one source of saving would also be advisable since you never know what the financial markets are going to do. However you decide to save for retirement, don’t rely on your pension alone. You may find that there just isn’t enough there to meet your needs.

Roth IRAs, 401(k), and 403(b) – Which one is Right for Me?

The task of planning for retirement can seem confusing, but it doesn’t have to be. You can learn about the different options. But you’re probably wondering - Roth IRAs, 401(k), and 403(b) – Which one is right for me? The following overview of each might help you make that decision.

The Roth Individual Retirement Account (IRA) is less than 10 years old, but it has been widely used since its introduction. Contributions to this IRA are not tax-deductible, but the funds can be withdrawn tax-free after the age of 59 ½ if the account is five years old or older. The Roth IRA does allow for some early withdrawals without penalty, but you are limited in the amount of money you can contribute, only $2,000 per person for a joint account. If you won’t be retiring for a number of years, this might be a good match for your retirement plan rather than a traditional IRA.

A 401(k) is a defined contribution plan in which the employer makes contributions. The employee may make contributions, but they are not required. The amount of money you can have contributed to a 401(k) is considerably larger than an IRA, so they may have an advantage if your employer offers them. They also have the benefit of being transferable should you ever leave your current job. These funds may be left as they are, moved to a new 401(k) plan with your new employer, they may be rolled over into an IRA, or they may be dispersed as a lump sum. Remember, however, if you take the lump sum you will have to pay a penalty for early dispersal.

The 403(b) plan is similar to the 401(k) except that it is restricted to employees of educational institutions or staff of non-profit organizations (501(c)(3)s as determined by the Internal Revenue Service). They are tax-deferred until the funds are withdrawn, and are generally an addition to the normal pension plan that educational employees and non-profit organizations give their employees. Having a 403(b) will not affect your social security benefits, and this plan can be used by part time employees as well. This plan does not allow you to move your account without paying penalties, unlike the 401(k).

These short overviews for the Roth IRA, 401(k), and 403(b) plans are not exhaustive, but they might help you answer the question, “Roth IRAs, 401(k), and 403(b) – which one is right for me?” The person who can best answer that question, however, is a trained professional such as a financial planner or counselor. Remember, ultimately the choice belongs to you. Listen to the advice and then you choose based on the information you understand.

Advantages and Disadvantages to 401(k) Plans...

The 401(k) plan, or “defined contribution plan,” is so called because the amount of contribution is measurable; the amount you receive upon retirement is not measurable. There are advantages and disadvantages to 401(k) plans. Choosing to invest in this type of plan is entirely up to you. You might want advice of a qualified certified public accountant (CPA) or financial counselor.

Advantages of the 401(k) plan include:

• Tax Deferred. All savings for retirement in this plan are tax deferred. This means the contribution is taken out before taxes are paid on your paycheck. Taxes will be paid on the amount withdrawn, however.
• You have a choice. You have a choice in how much you contribute; therefore you control how much you are able to save. Your employer may contribute a matching percentage which will help the amount you save grow even quicker.
• Payroll deductions. Most companies will have 401(k) contributions taken automatically taken out as a payroll deduction. You should also get quarterly reports from the investment company.
• Will not affect Social Security. Your 401(k) account will have no bearing on the amount of money you will receive from Social Security. Since Social Security was established to help supplement your income, you will want to have another source of income, and a 401(k) can provide that income.
• Your funds are safe. Even if the company you work for files for bankruptcy protection, the money you have contributed is safe. It is held in trust by a separate entity and cannot be touched in case of a bankruptcy. The money vested in your account is yours and remains safe.
• Loans are possible. Because the money in your 401(k) plan is yours, you may be able to borrow against it in the case of an emergency. Realize that if you do not make regular payments back into the 401(k), it will be changed to a distribution and all penalties and taxes will follow.

Disadvantages of having a 401(k) are varied:

• Loans are possible. While many might think the ability to borrow against your 401(k) is an advantage, the ease by which you may borrow really makes it a disadvantage. If you fail to repay the loan, you may face stiff penalties and possibly forfeit the remainder of your 401(k).
• Market driven. Your money, when placed into a 401(k), does not have the benefit of being insured. In fact, depending on the investments that you’ve chosen, you could actually lose money while it is tied up in a 401(k). If you see that you’re starting to lose money on a particular investment, you might want to consider changing it.
• Limited payout. Unless you have chosen to invest in risky investments, you may not receive the return on your investment that you desire. Most financial counselors will suggest that you spread your investments out between conservative and risky investments.
• Employer limitations. Some employers may not allow you to contribute as much as you’d like. They may also choose not to match your contributions. In either case, you may not be able to save as much as you would prefer.

By looking at the advantages and disadvantages to 401(k) plans, you can see that much research or advice may be needed before choosing to sign up for the plan at work. A reputable financial counselor can give you the advice you need to make the best decision for your financial goals.

Understanding 401(k)... Is It For You?

401(k) plans are offered by a large majority of employers to help their employees save for retirement. However, there is much to learn about the 401(k) – details and explanations that will help someone decide whether a 401(k) is right for them or not.

Most employers provide tax-deferred investing to their employees in the form of the 401(k), which also helps to lower your taxable income because of the pre-tax deduction to fund the 401(k). However, you’ll want to leave money in the 401(k) rather than making withdrawals since the withdrawals will be taxable based on your tax bracket, along with having to pay penalties for early withdrawal.

There are restrictions to the 401(k) plan, based on what the employer chooses as investment opportunities. They are also limited by the 401(k) fund manager. Despite the restrictions, however, the 401(k) can be a wise choice for retirement savings.

A 401(k) is a defined contribution plan, meaning that you are not guaranteed a certain income upon retirement. The plan allows the employer and employee to make contributions to the employee’s 401(k). The amount of money you can contribute is generally set by the employer, and they will only match a percentage of what you contribute.

The longer you remain at your job, the more vested interest you will have in your retirement plan. The method for determining your vesting is determined by the employer and is usually related to the number of years you have worked for them and how long you have been contributing to the 401(k). Normally to become 100% vested, you will need to be employed for 10 years. Check with your human resources manager to determine the vesting rules for your company.

One major problem with a 401(k) and any other defined contribution plan retirement account is that you really don’t know how much money you will receive when you retire. Your nest egg at retirement will be based on how much money you contributed to the plan, what your employer contributed, and the performance of the investments in your portfolio. Seek the help of a qualified financial planner to help you decide if you should move your investments in order to get more of a return for your money.

Benefits of this type of retirement account include:

• Contributions are taken out pre-tax, so they lower your taxable income rate
• Contributions are sheltered when you make them
• Funds are often taxed at a lower rate when you withdraw them at retirement
• Your contributions and earnings are protected from income tax until withdrawal, which means the funds have more potential to grow.

Perhaps the biggest benefit of the 401(k) is the fact that it can be moved if you ever change jobs, usually without incurring any penalties. You may maintain the account as is (unless required to be removed by your employer), roll it over into another 401(k) account at your new employers, transfer it to an IRA, or make a withdrawal at the time. Remember, that making a withdrawal before you actually retire may cause you to pay stiff penalties and income tax on the withdrawal.

The 401(k) plan you have may be difficult to understand, but it doesn’t have to be. Speak with a qualified financial counselor to give you specific information about the 401(k) – details and explanations – to ensure you understand the benefits and potential problems of having this type of retirement account. Your financial planner can give you good advice, but you have to seek them out.