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1617 NE 12TH AVE
SUMTERVILLE, FL 33585

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Jeffery W. Masters & Associates, Inc.

954.977.5150

 

Advice on 401Ks

ADVICE ON 401KS

According to a recent survey by the Employee Benefit Research Institute, only 13% of workers are "very confident" about having enough savings for a comfortable retirement (confidence study EBRI March 2011). The demise of traditional pensions or other employer sponsored retirement plans has caused workers to rely solely on their 401K to build a retirement nest egg.

Labor statistics show the average American will hold 11 jobs between the ages of 18 and 44, and many sadly fritter away their retirement savings in between jobs. According to a Hewitt Associates survey of employees who changed jobs, 46% cashed out; only 25% rolled their plan into a personal IRA or new employer 401k, and 29% just left it behind at the old employer.

Cashing out your 401k may be the Worst Option
As mentioned above nearly 50% of people who change or lose jobs cash out their 401k balances. While it may be attractive to get cash in hand, this may be a very costly idea in the long run. There are significant penalties involved in this option. You generally will face a 10% penalty if you are under age 59 1/2, and the amount you cash out will also be subject to ordinary Income Tax. But most important, the moneys you intended for your future retirement will lose the potential benefit of tax-deferred compounding for a time when you will need it in the future.

Grab your Employer's 401k match
Join your company's 401k plan as soon as you become eligible, and sign up for the portion that the company matches. So, if your company matches 50 cents for every dollar you contribute up to 6% of your salary, then sign up for the 6%. I usually recommend not going past this matching amount until you have funded completely a Roth IRA (and one for your spouse too if you are married). But if you have completely funded the Roths, or are disqualified from funding a Roth, then go back and fund more than the match in your 401k.  If your company does not offer any match, you will need to evaluate whether it is a good choice to fund the 401k at all.  I prefer funding Roth IRAs first for clients, especially younger workers.  The Roth will be entirely tax free in distribution phase (age 591/2 or older in a plan 5 years old at least).  You will be very pleased in your Retirement years to be taking your income out Tax Free for sure.


Don't Borrow from your 401k
Many 401ks allow you to borrow money from your account for up to 5 years, but you should resist this temptation! It may look good on paper, but time out of the market may cause you to miss out on potential gains. You will have less income to take home as you will have a required payroll deduction to repay the loan, and if you leave work for any reason the loan could be due in full. Your 401k is not a glorified savings account, it is the money you are putting away for a time when you possibly will not be able to work, or choose not to.

If you are working for a company that does not offer a 401k, or if you are self employed, you do have options. You can establish and contribute to a self-employed 401k, a Simple IRA, or SEP where you make contributions to your own account as both the employer and employee. Contact a Licensed Investment Professional to help you evaluate the right plan and help you set this up. Remember prudence and wisdom is what you need "for riches are not forever " (Pvbs 27:24)


Contact Jeff to have your 401k evaluated

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.