401k – Invest for retirement

Years ago, almost every employee at every company received a pension through a company-paid pension plan. People stayed in a job for their entire careers, and companies felt it was their duty to provide this kind of loyalty after retirement as well. The greatest benefit of having a pension was that the employee did not need to contribute. Was a present. Then life changed and so did corporate America. Companies were still willing to help you after retirement, but they looked for other vehicles to do so. And so came the 401k plan.

The 401k became the preferred method for most (non-union) companies to help employees invest for the future. The employer really has no other responsibility than to select a financial institution, usually a brokerage house, to administer the plan. Although many companies have a contribution plan where they provide an additional percentage of their own contribution, there is no law that says they must do so. In today’s financial climate, most companies don’t contribute or contribute very little.

There is an annual threshold of $15,000 per person, regardless of salary. You can choose the funds in which to invest your money, but, of course, you are limited to the funds available from the brokerage firm that administers the employee 401k plan.

While the concept of a 401k is appealing, not every plan is worth investing in. Many employees opt out of their company’s plan because after some research they may find that the funds (mutual funds) have not performed well.

When you contribute to a 401k, you’re using pre-tax dollars. If you need to make an early withdrawal (before age 59), you will be penalized and taxed at your regular rate.

If you must change jobs, don’t forget your 401k. Talk to a financial advisor about “rolling it over” to a new 401k at work, or rolling it over to a Roth IRA.