401(k) Questions and Answers

Should I invest in a 401(k) plan? Well, if your employer offers a 401(k) plan and matches any part of your contribution, it really makes no sense not to participate in the plan. It's free money. The only reason would be if you were already independently wealthy; but then, you probably wouldn't have an employer in the first place.

What does "matching" mean? Matching is one of the best features of 401(k)s. Let's say, as an example, that you have a job which pays you $40,000 annually. You're allowed to contribute 20 percent of that salary under your employer-sponsored 401(k) program's rules. As a bonus, your employer contributes – or matches – 50 percent of every dollar that you contribute up to 6 percent of your salary. So, let's figure this out. Your allowable yearly contribution is $8,000 ($40,000 x 20%). Your employer's contribution to your 401(k) account would therefore be $1,200 ($40,000 x 6% x ½). That's $1,200 free to you, that compounds in your account right along with your own contributions. It adds up very quickly.

How much should I contribute? Of course, that depends upon how much you can afford to contribute, but also upon your savings goals and how much time you have until retirement. You'll have to sit down and figure those variables out, but to begin with many experts say that you should be saving roughly 10 percent of your income. If that's too much, start with 5 percent and save more as your pay increases. But you'll want to save at least enough to maximize your employer's matching contribution; in other words, get as much of the free money as you can. In the example above, you should at least be contributing 6 percent of your salary because it's the portion that your employer will be matching.

What's the most that I can contribute? The federal government sets limits for maximum yearly contributions to 401(k)s. For 2007 and 2008 the limit is set at $15,500; however, the amount is adjusted periodically for inflation. If you're over 50 years of age, you can contribute an additional $5,000 each year. But, some 401(k) plans themselves limit the amount of your yearly contributions, such as that of our first example. So, the maximum that you can contribute yearly would be the lesser of the federal limit or your particular plan's limit, if it has one.

I'm new to investing; what should I put my money in? The best advice for newcomers is to start conservatively, possibly with a money market fund or guaranteed investment contract (GIC). You won't earn a lot of money, but your money will generally be safe and you'll have your foot in the door. In the meantime, study all that you can about investments.

What's a "balanced fund"? A balanced fund is a good, solid choice for many investors. It's a mixture of different types of funds; perhaps 60 percent stocks and 40 percent in bonds. With it you have a reasonable exposure to the stock market (with its higher possible gains and higher risks) along with the stability and income of bonds.

What do I do if I need the money after I've put it into the plan? Most plans allow you to borrow the money in your account and, as long as you pay it back, there are no penalties. You can also withdraw the money permanently for certain hardships, again without penalty.

Can I lose my money in a 401(k)? Yes, it's possible to lose money. For example, if you buy shares of a stock fund and it tanks, you could experience a loss. That's why it's important that you educate yourself and invest prudently and wisely. However, your employer cannot keep your contributions; the account, and all that's in it, belongs to you.

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