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Consider Your Options 2007

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Tax Guide for Investors

Your Company's 401k:
A Golden Opportunity

Millions of Americans are letting wealth slip through their fingers.

It's not too late to make a New Year's resolution: take advantage of your company's 401k plan. If you aren't contributing, at least up to the amount your employer provides matching contributions, you're throwing money away with both hands.

  • On the one hand: You're missing the chance to put pre-tax dollars into a retirement account where earnings can grow tax-free until you make your withdrawals, which can be decades later.
  • On the other: You're missing out on free money your employer is offering to contribute to your account.

The combination of these benefits is incredibly powerful. Assume, for example, you're in the 25% tax bracket and your employer matches your contributions (up to a limit) at the rate of 50 cents on the dollar. When you contribute $100, you save $25 in taxes, so the contribution costs only $75. At the same time, your employer kicks in $50, so the total amount going into your account is $150. You pay only $75 to get $150 into your account.
    Now let's suppose you leave the money in the account for 25 years. It doesn't have to be in the same retirement plan all that time: you could change jobs and roll it to a new 401k or to an IRA. If your average investment return over that period was 8% a reasonable enough number you would end up with over $1,000. That's $1,000 from a contribution of just $75.
    Some employers offer a smaller matching contribution. A match of, say, 20 cents on the dollar may not seem all that exciting. Yet that 20% boost is enough to take years off the amount of time needed to accumulate the money needed for retirement. Even if you aren't looking to retire early, you'll appreciate the cushion provided by those added dollars.

A 401k can a good deal even without the match, but for some people it makes more sense to pump retirement savings into an IRA (traditional or Roth) when matching contributions are not available.

Bad stats

Millions of Americans pass up the chance to contribute to a 401k with matching contributions. Millions more make contributions far smaller than they should. That's a huge amount of wealth slipping through their fingers.
    Make a New Year's resolution to take advantage of your company's 401k. Can't afford to do this? You can't afford not to do this. If you got a $75 speeding ticket you'd find a way to pay it, wouldn't you? Once you get it going, you won't feel the pain because the contributions come out of your paycheck before you ever see it. Meanwhile you can keep reminding yourself: each $75 can turn into more than $1,000.

That won't happen, of course, if you cash out your 401k when you change jobs. That's another thing that happens a lot, and another good way to destroy wealth.

You can be wealthy

A majority of Americans have the opportunity to build a comfortable retirement and be wealthy by any reasonable standard. Most of us blow the chance by saving far less than we should. For many people, a 401k with matching contributions is the single most powerful wealth building opportunity available. If you're ignoring your company's 401k, now is a good time to change your ways.




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