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Financial Planing

401k Plans


401k plan investing is a type of retirement plan offered here in the United States. It is named after a section of the IRS code, 401k. It is an employer sponsored plan where employees can save money tax deferred (you are not taxed) up to a certain amount on a yearly basis currently not exceeding $16,500. Which means that your pay-check will only get taxed after you contribute to the plan? The money you deposit or contribute to the plan grows with each contribution you make whether it’s 3%, 5% or 10%. The gains or interests you make on your money is not taxed, only when you retire will it get taxed upon withdrawal.

A 401k plan is one of the easiest ways to save for your retirement. It is the single most important thing one can and should do immediately no matter what your age is. If you are visiting this site from another country, please look into your employer’s version of a retirement plan. Call or visit your Human Resources representative and get the paperwork started. They should be able to help you and guide you through the process. If not, contact their manager and demand that someone help you. It is very important for your financial future and security. Please don’t wait! Common excuses range from “I’m still young”, “I have plenty of time to catch up”. No you don’t! The sooner you start the better off you’ll be. If you wait to long – you’ll get married, buy a house and have kids. Then you won’t be able to save so start NOW! Let the power of compounding work for you because the earlier you start the better off you’ll be.

You only have to do a very few things right in your life so long as you don’t do too many things wrong.–Warren Buffet

If you’re working and not contributing to your 401K plan you are making a huge mistake. Most employers match your contribution up to a certain percentage, that’s FREE money! It’s important for you to get started right away. Sign up and invest at least 3% of your salary (the more the better) you won’t miss it, believe me. Then each year increase your contribution at least 1%. As of this writing your limit to contribute for 2009 is $16,500. Obviously not everyone can contribute that amount of money. However, every little goes a long way toward your retirement goal. But the important thing here is to get started now. Ask your co-worker or someone you trust to help you if you don’t understand the process. Do not be intimidated. Again, investing in a 401(K) retirement account is the easiest way to build wealth for yourself and your family.

Food for thought: 80% of retired seniors are currently living at or below the poverty level. If that doesn’t scare you then you better get yourself checked out. Also, it’s a fact that most baby boomers that are close to retiring (those born 1947-1964) have less that $50,000.00 in their retirement accounts, hardly enough to live past two years. However, you can always work at Wal-Mart or at your local convenience store if you like. If you already have a 401k plan and want to roll it over click here for some important information

A Short Comment About the recent Economic Crisis

During these uncertain economic times we must show patience and resolve. Please do not take out your money from a current 401k plan. The markets will eventually rebound.

No doubt that it is scary to look at your portfolio or your monthly statements during this financial recession. However, this might be the time to start adding to your plan. If you can then increase your contribution 1%-3%. Don’t think that it’s over or the end of the world is near. This is an opportunity where one can really make some money so please think it over and then nibble at bit at your account by adding accordingly.

The most important thing is to be debt free so please try to eliminate credit card debt first and then add to your 401k plan. However, consider investing outside of the US. I honestly think that the current market will continue to decline. With that said, I would shift my money into emerging markets or other funds that invest abroad (Brazil, Russia, India and China) also known as BRIC. The current US situation is dire and I would focus my attention to shifting funds. Again this advice is not to cash out, but to move into solid funds. If necessary rollover your account to another firm.

401k – To Withdraw or Borrow

During an economic crisis people tend to withdraw money against their 401k plan for a number of reasons. They can range from loss of job, health issues or mounting bills that become too hard to keep up. However, withdrawing from your 401k plan is not a good idea. The main reason is that you will get penalized 10% and, in addition you will pay ordinary income taxes on your money. That’s a huge hit that a lot of people take, but if it can be prevented, please don’t do it. Consider borrowing instead if you really need access to this money. Some 401k plans will allow you to borrow money and pay it back via your payroll at interest. This is a better choice, but obviously not withdrawing or borrowing is a lot better.

An alternative strategy, try to lower the amount of your monthly contribution. This can help in many ways avoiding the huge tax and penalty that you have to pay if you choose to withdraw a certain amount. Cut down in other ways such as brown bagging your lunch. For great ideas where to cut and save money. Whatever the challenge, please consider your options carefully and don’t rush in to withdraw your money.

Borrowing from your 401k plan to buy a house is a great choice when money is needed and it should be the only time that you should borrow from your retirement account. It’s an excellent way to put a down payment on a house without getting penalized. Consult your Benefit provider for details, but I’m sure you will not get taxed nor penalized if used to buy a home. I believe only first time home buyers qualify.

Again during these hard times, please be careful and don’t pull your money if you get scared. If that is the case leave it there and then research alternatives ways. Europacific Capital is an excellent organization to move your money into if necessary. Peter Schiff is an outstanding individual who has his pulse on the economic crisis. Do not listen to tv gurus or your government. You need to look out for yourself and your family.

 401k Rollover

A 401k rollover is not as hard as you think, but there is work involved. If you are going to leave your job one of the things you have to consider is taking your 401K plan with you. But, before you do, it is always important to keep your account information in a safe place where you can refer to it immediately. Keep your quarterly statements filed away in a file cabinet and make sure you beneficiary information is up to date.

The easiest way to a 401k rollover is to open an IRA account that are a reputable mutual funds with low fees.

Although you can rollover your existing plan to your new employer, I personally do not like the idea. I’ll tell you why, it’s easier for you to manage your accounts on your own as long as you select the right funds. One reason is that you might not stay at your new job long then you’re back rolling over your retirement account yet again. If you open a new account for a plan with a mutual fund, you will you have one account with them and a new 401k plan with your new job. If you decide to leave or you’re let go, you can easily get this done and transfer the money to your mutual fund company which is always with you.

It’s not that hard, but keeping your accounts with one company is the way to go especially if you and your spouse are both leaving and starting new jobs. It makes it easier to manage as well. You can also link accounts to your checking account to deposit money into different funds as you like. That’s a benefit that you won’t have with your 401K plan. A fund company offers funds that may be better and broad than your employer. A fund company may have lots and lots of funds to pick from that makes it easier for you to choose from.

A 401k rollover does not have to be hard, with proper planning and organization is a lot easier than you think.

Keep saving!

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