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401k Contributions 2007: Mutual Fund Growth Investments, Rollovers And Retirement
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Published: May 23, 2007
Retirement is supposed to be a time for hardworking people to relax and spend time doing the things they enjoy with the people they love. But how can one be sure he or she will have enough savings to actually live out their retirement dreams? Saving for retirement can be a stressful and confusing endeavor, but 401k plans are consistently one of the simplest and beneficial ways to save in the future.
401k plans are popular in the U.S. and available in some other countries as well. Put simply, it is an employer sponsored retirement plan. Some companies offer it; some do not. But if a company does, employees should use their 401k plan to its full potential. In fact, many advisers recommend first saving the maximum amount through a 401k plan (or other retirement plan) before doling out funds toward other investments. Some people are lucky enough to work for employers who will match a portion (or percentage) of their 401k contributions. In order to get the maximum benefit from a 401k plan, employees should begin as soon as they're given the opportunity.
The way it works is a portion of the participant's wages are directly deposited into their 401k plan. The participant is able to decide how much they want to contribute to their 401k plan, but there are regulations and limits put in place by the government and individual employers. The 2007 401k contributions limit is $15,500. This is up $500 from the 2006 401k contributions limit. The catch up contribution limit for both 2006 and 2007 was $5,000. This is only an option for people over age 50. Keep in mind that these limits are set by the government, and individual employers can set additional guidelines. Employers generally use a percentage (such as 4% or 10%) of a participant's salary to determine the maximum they can contribute toward their 401k plan each year.
The most common type of 401k plan is participant-directed. This means the participant can decide exactly how and where to invest their hard-earned dough (mutual funds, stocks, bonds, money market investments, etc.) Over a long period of time, stocks tend to perform much better than other avenues (such as money market investments). Some companies even offer the option of buying company stock. Perhaps the smartest reason to invest in a 401k plan is that the participant does not have to pay any taxes on the saved money until they take it out.
One of the biggest questions people have about their 401k plan is, “What happens if I leave or change my job?” The best option in this situation is a 401k rollover. A 401k rollover is when the money invested with one employer is transferred to an IRA (Individualized Retirement Account) or other qualified plan. In between jobs is also one of the best times to consider consolidating accounts if a participant has many different investments. One of the worst things to do, however, is to cash out a 401k plan before reaching the age 59 ½. Not only will the participant need to pay taxes on it, but also a 10% penalty that is difficult and complicated to get around. Exceptions can be made, but are rare.
Sources:
Bailyn, Russell. "Rollover Your 401k." Russell Bailyn's Financial Planning Blog. 12 Aug. 2005. 18 May 2007. http://www.russellbailyn.com/weblog/2005/08/rollin g_over_your_401k.html.
Woodard, Dustin. "401k Contributions Limits." About: Mutual Funds. 2007. About, Inc. 18 May 2007.
http://mutualfunds.about.com/od/retirement/a/401 k_limits.htm.
"401(k)." Wikipedia. 10 May 2007. 18 May 2007. http://en.wikipedia.org/wiki/401(k)
401k plans are popular in the U.S. and available in some other countries as well. Put simply, it is an employer sponsored retirement plan. Some companies offer it; some do not. But if a company does, employees should use their 401k plan to its full potential. In fact, many advisers recommend first saving the maximum amount through a 401k plan (or other retirement plan) before doling out funds toward other investments. Some people are lucky enough to work for employers who will match a portion (or percentage) of their 401k contributions. In order to get the maximum benefit from a 401k plan, employees should begin as soon as they're given the opportunity.
The way it works is a portion of the participant's wages are directly deposited into their 401k plan. The participant is able to decide how much they want to contribute to their 401k plan, but there are regulations and limits put in place by the government and individual employers. The 2007 401k contributions limit is $15,500. This is up $500 from the 2006 401k contributions limit. The catch up contribution limit for both 2006 and 2007 was $5,000. This is only an option for people over age 50. Keep in mind that these limits are set by the government, and individual employers can set additional guidelines. Employers generally use a percentage (such as 4% or 10%) of a participant's salary to determine the maximum they can contribute toward their 401k plan each year.
The most common type of 401k plan is participant-directed. This means the participant can decide exactly how and where to invest their hard-earned dough (mutual funds, stocks, bonds, money market investments, etc.) Over a long period of time, stocks tend to perform much better than other avenues (such as money market investments). Some companies even offer the option of buying company stock. Perhaps the smartest reason to invest in a 401k plan is that the participant does not have to pay any taxes on the saved money until they take it out.
One of the biggest questions people have about their 401k plan is, “What happens if I leave or change my job?” The best option in this situation is a 401k rollover. A 401k rollover is when the money invested with one employer is transferred to an IRA (Individualized Retirement Account) or other qualified plan. In between jobs is also one of the best times to consider consolidating accounts if a participant has many different investments. One of the worst things to do, however, is to cash out a 401k plan before reaching the age 59 ½. Not only will the participant need to pay taxes on it, but also a 10% penalty that is difficult and complicated to get around. Exceptions can be made, but are rare.
Sources:
Bailyn, Russell. "Rollover Your 401k." Russell Bailyn's Financial Planning Blog. 12 Aug. 2005. 18 May 2007. http://www.russellbailyn.com/weblog/2005/08/rollin g_over_your_401k.html.
Woodard, Dustin. "401k Contributions Limits." About: Mutual Funds. 2007. About, Inc. 18 May 2007.
http://mutualfunds.about.com/od/retirement/a/401 k_limits.htm.
"401(k)." Wikipedia. 10 May 2007. 18 May 2007. http://en.wikipedia.org/wiki/401(k)
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