Building a Nest Egg Requires Knowledge and Time
There are some general rules workers should be aware of when operating a 401K/403B plan.
1. Savings Plans have defined limits – this means you cannot save ALL your pay
2. Most plans allow a company match, where the company matches what the employee contributes, to a specific proportion. This can range from 10% to 800%, depending on the company.
3. All plans allow for automatic deductions, which are taken directly out of the paycheck.
4. Many plans allow supplemental after-tax contributions by the employee. This means that after the maximum amount is saved that is subject to matching, additional contributions to the absolute limit can be made.
Some recommendations that can help you make the most of your plan:
- ALWAYS contribute enough to max out matching employer contributions! Remember that your employer’s contribution is free money.
- Also consider contributing beyond this basic level, especially if you are not a disciplined saver.
- However, also remember that despite the recent financial turbulence, stocks or mutual funds with long-term gains may offer a better bet because they are taxed at 15% vs. up to 33%.
Also:
- AVOID withdrawals (and loans to yourself) from your retirement account before age 65. For withdrawals: You will pay up to 40% combined Federal and State taxes, PLUS a punitive 10% withdrawal fee. Even if you pay it back, it represents a very expensive loan.
- Automatic deductions before you even see your paycheck are the best approach to disciplined savings.
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