401K Contribution: Save For Retirement By Making Your 401K grow!

401k Contribution...

Making a 401k contribution can be a very self satisfying experience. Choosing which 401k program to use can be very difficult however. The truth is that it can be very hard to find a better vehicle for retirement savings...especially if your employer has a matching contribution policy.

Follow along with the articles below to learn more and get better prepared to make your retirement life all that much easier.

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How much do you have on your 401K contribution or other retirement plan?

"I don't have enough money to save!"

How many times have you heard that comment?

Are you guilty of the same comment?

Let's face it, we find anything and everything to justify not being able to save for retirement, but the reality is that the money is there, we just neglect to look at it that way. Saving just $100 a month as a 401K contribution or other retirement plan equates to $1200 a year. Assuming an interest rate of 6-8%, your investment can grow to about $20000 for that first year's investment when you retire around 60. Remember, that's just the first year. If you started at 18 years, you will also have over 40 years of savings accumulated to about $60000 which also grows.

Where does $100 come from? Well, how much do you spend your morning coffee? If you go Starbucks daily for that morning cup of joe, then you're probably spending at least $5 per day for 5 days. That equates to $25 a week or $100 a month.

Okay...maybe you don't drink coffee. Maybe I can use the example of one night out in town with your buddies. All it takes is going out once a month and picking up a tab of $100 and there you have it. Or maybe just eating McDonalds for lunch everyday at work will set you back at least $5 per day. Do you see my point yet? The money is there, we just have to be wise on how we spend it.

Now, how does my 401K contribution turn into a million dollars by the time I retire? That's a simple answer...the power of compound interest. An example of how strong compound interest is the use of the rule of 72. Simply put, take 72 and divide it by the average annual interest rate and that's how long it will take for your money to double. A reasonable interest rate is 6-8% and investing in aggressive growth mutual funds usually yield around 12-14%. For this example we will use 10%, which means that 72 divided by 10 will double your money every 7.2 years.

With that said, if you started working at 18 and you saved about $10000 by the time you are 20 and decided to no longer put any money into your account, then that $10000 can continue to grow until withdrawn at retirement (normally between 62-69 years old). Assuming you maintain a 10% interest rate, then your money will double to $20000 by the time you are 27, then to $40000 at 34, then to $80000 at 41, then to $160000 at 48, then to $320,000 at 55, $640,000 at 62, and $1,280,000 by the time you reach 69. There's your million dollars.

How much do I provide for my 401K contribution? There is no hard, fast rule on contributions. It is all relative to your income and liabilities, such as bills. Most people use 10% of their monthly income. Just remember, as your pay increases with time, always remember to increase you 401K contribution (10% of your pay raise is also a good rule for increasing your contribution). The good rule is just save what you can and continue to contribute so saving can become a regular habit.

A 401k plan is one of many retirement plans that employees can utilize to help them save their way to success. The number refers to the IRS tax code and is a law that allows for pre-tax contributions by an employee to their own retirement account.

Benefits include lowering current year tax burden and a program that allows for periodic investment for the future. There are several types of these plans but two stand out.

An employee directed 401k plan is the most popular plan available. Here the assets in the employees account is spread across various investment types as directed by the employee. Typically the types of investments are stocks, bonds, money market funds, and mutual funds. Employees are free to decide which percentage of their account is invested in each of the investment types. As one would guess, the risks associated with the base investments are not reduced by the mere fact that the money was invested via one of these plans...if the stock falls in price, the account value falls with it.

Another type, but less popular, is the trustee directed plans. Here a trustee, typically a financial adviser or company, manages all contributions into the plan. Just as many people sign on with financial companies to manage their investments, a company who offers its employees a retirement plan contracts with a professional investment adviser to manage the entire account. The benefits are the access to professionally managed retirement accounts... Supposedly the professionals know what they are doing and are more capable of managing our money than we are.

One major attraction that these plans have are the employer contributions. Many employers offer an incentive for employees to make contributions by making a deposit into their account at a percentage rate of the employee's contribution. Many people see this as free money and take advantage as much as possible. One type of employer contribution is calculated as a percentage of the employee's contribution. Another type is what is known as profit sharing where the company agrees up front to deposit a pre-determined percentage of the company profits to the 401k program. Another option employers have is to offer stock in the company for purchase into the plan.

401k plans are an attractive and effective way of investing for our retirement. They offer pre-tax benefits where our current year tax payments are reduced. Many times they offer employer contributions that boost the value or offer essentially discounted stocks. Finally, and most important to me, they offer a structured plan for periodic automatic investment that provides me a way to save without thinking or action...Exactly what I need!

Are you working? Does your company have a 401K plan? Are you contributing into this plan? If not, why not?

If you are working for decent size company, then you really need to look at investing a percentage of your income into that company's 401K retirement plan.

Let's face it, the days of working for a company for 20-40 years and receiving a monthly pension after retirement are long gone. About the only exception nowadays is service within the military branches. All other federal and state civilian jobs have switched over to other retirement plans many decades ago. Even the military has even launched a savings incentive called the Thrift Savings Plan (TSP). The TSP is very similar to a civilian employer's 401K plan with the exception of matching contribution.

There are various retirement plans out there, but the 401K plan allows you to save for retirement while deferring the current income taxes on the saved money and earnings until withdrawal. Saving has gotten easier, because you can elect to have the contributions deducted automatically from your paycheck, so you won't even know that it's gone. Another benefit to this, as compared to IRAs and other tax deferred plans, is that the employer can elect to provide matching contributions. This means that for the amount of money you contribute, the company can match a part up to 100% of your contribution, but not to exceed the maximum annual contribution.

So what about the Roth IRA? This retirement plan also provides for tax deferred savings, but doesn't allow for matching employer contribution. This was true until the start of tax year 2006, where the employee can now elect into a Roth 401K plan. The maximum limit also applies, which currently stands at $16,500 maximum annual contribution. The contribution limits are indexed based on inflation and raised at increments of $500.

Your contributions are usually invested in mutual funds that emphasize stocks, bonds, money markets, and a combination of them. The employee normally has control of where to invest the money. If the company has matching contribution or profit sharing, then they may require a probationary period of matching contributions depending on your tenure with the company. However, you can elect to the 401K plan immediately after hiring.

Regardless of the route you choose, ask questions, keep yourself educated on the plans, and choose to save. Choosing to save for the future will provide you a more secure financial future. Again, if you are working for a company that offers a 401K plan, then choose that plan and when financial situations warrant, you can diversify with other retirement plans in conjunction with your company's plan.

The options available to make a 401k contribution are limited. 401k plans have become extremely popular vehicles that people are using extensively to save for their retirements. Here we will discuss three options for making these contributions and how they can benefit us.

The three basic choices we have to make a 401k contribution are before tax contributions, after tax contributions, and Roth 401k contributions. Lets take a good look at each of the three below:

Before tax contributions-

These contributions provide the benefit of lowering your taxable income today. When you make this type of contribution, you are able to deposit more money into the plan and lower your take home pay- this leaves you with more money in your pocket now. The down side is that when you take it out at retirement, you will have to pay tax on both the principal and interest earned.

After tax contributions-

when you make after tax contributions you are putting money in that will not be taxed when it is withdrawn later but the interest will still be taxed. On the surface this might seem like it is not a benefit but it does bring extra flexibility when you need access to those funds before the maturity date of the 401k. (Taking money out that you already paid taxes on incurs no penalties from the IRS).

Roth 401k contribution-

The contributions you make have already been taxed. Further, the interest you earn from those contributions are NOT taxed. As long as you have the account for more than 5 years and do not take it out before 60 years of age, this is GREAT! The one issue is that any employer contributions and interest earned on those contributions will be taxed when you withdrawal.

Choosing between 401k contribution options can be a difficult task. As long as you understand the features and benefits of each of the three ways you can make a 401k contribution you will be better armed to make the right choice!

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