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You are here: Stocks Investing Guide >
401K Retirement
Plans > 401K Benefits Plan |
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401K Benefits Plan
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A 401(k), also called
Equivalent Accrual Plan Rate (or EBAR, by those in
the know) is the post-modern answer to the
traditional pension plan, where the employer paid
into an account that was later paid to the
employee upon retirement. The 401K is a "defined
contribution plan" whereby the employee makes
contributions from each paycheck and the employer
matches the funds. The employee can select from
the investments made available from the employer,
which may include stocks, bonds, mutual funds or
other securities. Some companies have their own
stock on offer, but if you've read about the
importance of
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diversification, you
won't put all your money (or even most of it) in the
stock of a single company, even if that company happens
to be named Coca-Cola. Fidelity and Merrill Lynch are
two companies that handle 401(k)s. (Did you know that
Fidelity's net rose 20% in 2005? Now there's a company
to invest in!)
Although we've all heard of the 401(k), there is also a
403(b) and a 457 plan. These plans have the same basic
components, but the 403(b) is for religious, educational
and non-profit organizations, and the 457 covers
government retirement plans at the local and state
level.
401(k)s were invented to come to terms with the fact
that people and the companies they work for rarely have
committed relationships that continue for most of a
career as some once did. When an employee with a
traditional pension plan leaves a place of employment in
less than the stated period of time (set by the
company's policy), he or she may lose any benefits that
had been accrued. Companies have knowingly forced people
to retire or downsized them before their retirement
packages could go into effect, depriving them not only
of their current livelihood but of any income they would
have had from their retirement accounts. The 401(k) lets
people move from job to job without being penalized by
having their savings taken from them, and in a time and
place where people often stay at a job only a year or
two before being replaced with cheaper labor or moving
on to a bigger job, that's a good thing.
For 2006, the maximum annual contribution to a 401(k) is
$15,000, and if you are over the age of 49, you can put
in $16,000 as a catch-up maneuver.
Basically, if you have the option to use a 401(k), you'd
be crazy not to. Your employer puts in dollar for dollar
what you put in, so that with a maximum contribution,
you could be investing $30,000 a year without paying for
half of that total. That's more than 7 times the annual
contribution to an IRA, and you'd have to pay all of
that yourself. Now, if you leave before a predefined
period of time, you may lose some or all of your
earnings, but your plan should provide for you to take
with you what you put in, so you can roll it over into
an IRA or put it into the 401(k) at your next
employer's. Rollovers are one great way to keep saving
for retirement even in a "portfolio career".
Because the 401(k) is paid of pre-tax earnings, you reap
some significant benefits. First, you don't pay taxes on
what you contribute until the time comes to take it out
of the account; second, your Adjusted Gross Income is
reduced by the amount you've contributed to the 401(k),
so your income tax for the year will be lessened.
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How to stick to a household budget
and have extra
money for investing
1. Customize your budget with your current needs, wants and future goals in mind.
2. Try to think if your budgeting plan as a "spending" plan rather than penny pitching.
3. Sit down and rationally discuss budget goals and spending limits with your spouse. You are bound to disagree somethere, but it important to take the time to find common ground.
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