“She said I’m gonna get my MBA, a corner office and 401k…”: A Look at Retirement and 401k’s

As hard as it may be to acknowledge, we have to come to terms with the fact that we’re getting old, lol. Grinding can only be done with an able body; there’s not too many 70 year olds “on their grind”.  That would probably be because the whole point of “being on the grind” now is to save and prepare for when grinding is no longer an option.  Just as important as short-term savings is long term savings for when the grind is over, lol.  The most common form of retirement savings would be 401k  plans.

According to About.com, “A 401k retirement plan is a special type of account funded through pre-tax payroll deductions. The funds in the account can be invested in a number of different stocks, bonds, mutual funds or other assets, and are not taxed on any capital gains, dividends, or interest until they are withdrawn. The retirement savings vehicle was created by Congress in 1981 and gets its name from the section of the Internal Revenue Code that describes it; you guess it – section 401k.” Many employers offer 401k plans as a part of their benefits package.  Usually after a certain number of years on the job, your employer will match a percentage of your contribution to your 401k account.  This would be in addition to the amount of pre-taxed dollars you withdraw from your check for your 401k account.

As many of us young people manage our finances, we rarely think about our 401k contributions.  Retirement seems so far ahead, meanwhile Bloomingdales and American Express expect their money at the end of the month.  The article goes on to explain how investing in your 401k may be more beneficial than rushing to pay off credit card debt. More specifically it states, “Even if you have high-interest credit card debt, it is preferable, in almost all cases, to contribute the maximum amount your company will match! The reason is simple math: If you are paying 20% on a credit card and your company is matching you dollar-for-dollar (a 100% return), you are going to end up poorer by paying off the debt.” Of course living within your means will limit credit card debt and leave more money to contribute to savings :-) But what’s credit when it comes to designer bags and shoes?! I mean technically those can be considered an investment, lol.

Outside of the “tax advantages” and “employer contributions”; additional benefits to 401k Retirement Plans according to the article include:

  • Investment customization and flexibility- 401k retirement plans give employees a range of choices as to how their assets are invested. An individual that knows he or she does not have a high tolerance for risk could opt for a higher asset allocation in low-risk investments such as short-term bonds; likewise, a young professional interested in building long-term wealth could place a heavier emphasis on equities. Many businesses allow employees to acquire company stock for their 401k retirement plan at a discount although many financial advisors recommend against holding a substantial portion of your 401k in the shares of your employer in light of the Enron and Worldcom scandals.
  • Portability- One of the benefits of a 401k retirement plan is that it can follow an employee throughout his or her career. When changing employers, the investor has four options: (1) Leave his/her assets in the old employer’s 401k retirement plan, (2) Complete a 401k rollover to the new employer’s 401k plan, (3) Complete a 401k rollover and move the assets to an Individual Retirement Account (IRA) or (4) Cash out the proceeds, paying taxes and the 10% penalty fee.
  • Loan and hardship withdrawals- The purpose of your 401k retirement plan is to provide for your golden years. There are times, however, when you need cash and there are no viable options other than to tap your nest egg. For this reason, the government allows plan administrators to offer 401k loans to participants (be aware that the government doesn’t require this and therefore it is not always available.)

An additional perk I recently learned about 401k loans is that any interest paid back is yours.  You’re paying yourself for borrowing money from yourself, as opposed to paying creditors to borrow money.  But like the article made note of the primary function of your 401k is to save for retirement.  Dipping into these funds should be limited to major cases such as: “primary home purchase, higher education, prevent eviction or foreclosure, severe financial hardship or expensive medical costs.”  Sorry no designer bags this time around.

Be sure to ask your employer about your 401k options and for those that are self-employed, be sure to look into Self-Employed 401k plans.  Retirement will be here before you know it, don’t be 70 and still grinding! xx

Happy “Investing in your 401k’ Ladies!! :-)

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