Planning for retirement<br>401(k)s and Individual Retirement Accounts

You’ve landed the good job, benefits and all, and included in that package is a 401 (k). The human resources officer or your employer explains to you that portions of your paycheck can be withdrawn and invested and the company will help match it. Sounds good to you - free money! But you are unfamiliar with investments and uncertain as to what exactly a 401 (k) is.

You aren’t alone.

A 401 (k) is a program designed to help you and your employer save money. The funds for your 401 (k) are automatically taken out of your paycheck before any income taxes are subtracted. Taxation comes later when you begin to take the money out, upon retirement. At this time, it is considered as ordinary income and potentially your tax bracket will be lower.

Knowing how to invest your money is the second question.

Employers typically choose your investment options giving you a few choices on how to channel that money into their options. Your decisions is to choose between stock options, growth funds or you can play it safe with more moderate funds. But how to decide, according to financial planner Tom Taylor of Taylor, Padgett, and Palmer Financial Planners, depends upon your financial objectives and personality.

"Many people come to me with questions on how to invest, what does stock mean, what is a bond, what happens when the market goes up or down," Taylor said. "I explain the basics and then I help them choose. Deciding how to invest is often dependent upon your personal financial goals and who you are. If you are somebody who worries a lot, then it may be better not to take too many risks."

Once you have decided how to split your money up, the second focus should be monitoring that money on a continual basis. It is most likely that you will receive quarterly statements explaining how your investment is doing. Taylor said, employees should watch for financial growth and make sure their investment decisions are meeting their objectives. He also cautions one to understand that the market will go up and down and that just because the whole cycle may be down, doesn’t mean you should withdraw your money. Ride it out.

What one should be attentive to is when an employer wants to change plans and money is often transferred to a money market. Taylor said the money will sit there until a new plan is adopted. He adds that money markets make the least amount on your investment and you don’t want it to sit there too long.

Another common question employees ask is what will happen if they withdraw their money early.

If you withdraw money too soon, you can expect to pay a 10 percent penalty plus around 20 percent in withholding taxes. That is unless you are preapproved by the IRS for a hardship case which includes: avoiding eviction, buying a primary residence, paying medical expenses of the participant or their spouse, or paying postsecondary education expenses.

The only time you want to mess with moving your money around is if you change jobs. If you change jobs, Taylor said there are four options you have: roll the money into your new employer’s plan (if they have one); if you have more than $5,000 in your plan you can leave it with your old employer; roll the money directly into a traditional IRA and avoid paying taxes on it; or cash it out and pay the penalties and taxes.

To safely, and without penalty, withdraw your money, you must be 59 — and you must begin taking annual distributions after you turn 70 1/2.

If your employer does not provide a 401 (k), you can invest your money into your own IRA, which for the most part is similar to a 401 (k), with the difference that somebody isn’t helping you contribute.

For more information on 401 (k)s, IRAs or Roth IRAs, consult your human resource officer, local financial planner or the web. Planning now helps you save your way into the future.

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