Is my 401(k) Still a Viable Investment?

Let's cut directly to the chase. The short answer is 'yes;' as a matter of fact, you absolutely should. Here are the reasons why. Let's assume that you took a substantial hit to your 401(k) plan when the stock market plummeted 5000 points just a little while ago. The amount of stocks, bonds, mutual funds and other holdings that your plan administrator continues to purchase at very low prices will eventually begin to increase in value once the market starts to rebound. If you do not contribute, you'll lose out on all of that potential increase that could flow into your retirement portfolio.

The old investing rule of thumb is still the same as it always was: "buy low and sell high." That much hasn't changed. Now is therefore the best time to make substantial contributions to your 401(k) plan, especially if you're young and have just entered into the business world, or if you've been around awhile and are only five- to ten years away from retirement. It's a good idea to check with your plan administrator to determine the maximum annual contribution amount that you're allowed to make. If at all possible, try to meet that amount each and every year, especially if your employer offers matching contributions.

If you can't afford to maximize your contributions, determine what percentage you can put away per paycheck so that at least you're contributing something to the plan. Take time to set up a household budget; this will help you to figure out just how much you can afford to contribute to your 401(k). Perhaps you can start with at 5 percent and increase your contributions by an additional 1 percent each year, until you reach the maximum allowed.

Your 401(k) grows tax-free until you're ready to draw on when you reach retirement. If you make an early withdrawal, you'll be taxed on the amount you take out, and you'll also have to pay a 10 percent penalty for early distribution – except in certain exempt circumstances for various hardships. For example, if you need money for your child's college tuition or to help you obtain mortgage for a new home, you can ask for a hardship distribution. You can also apply for a loan of up to 50 percent of the total amount accumulated in your plan. However, the loan must be paid back within five years, and if you default on a payment three consecutive months in a row, it will automatically be considered a distribution and therefore become subject to taxation.

While most economists estimate that the current economic crisis will last approximately 18 months or longer, you should nevertheless seriously consider whether or not you want to stop contributing or withdraw your money now. Remember, your 401(k) plan administrator will continue to increase the amount of equity in your plan; and at a time when stocks are at their lowest, this could turn into a major advantage in the not-too-distant future. Yes, your 401(k) plan is still a very important part of your financial future.

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