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401k Investing 101

In the earlier part of the last century it was common practice to have your employer provide a pension plan for when you retired. There was a mutual but unspoken employer / employee loyalty that is unseen in today’s world, and companies felt they were responsible for providing for you and your family in exchange for your years of hard work. Then everything changed. Companies suddenly didn’t care about employees or their welfare as did in years gone by. Instead of a company funded plan, the 401k was introduced. But it’s hard to get good 401k advice to know what to do.

The 401k became the preferred method for most (non-union) companies to help employees invest for the future. The employer really has no responsibility other than selecting a financial institution, usually a brokerage house, to manage the plan. Even though many companies have a contribution plan where they provide an additional percentage of your own contribution, there is no law saying they need to. In today’s financial climate most companies either don’t contribute, or they contribute very little.

The law allows employees to invest a maximum of $15, 000 a year. It doesn’t matter how much they make. These funds are comprised of mutual funds of varying degrees of safety, and you can choose which ones you’d like to invest in. Keep in mind that you can only invest in what the brokerage firm sponsors.

Although a 401k might seem ideal at first glance, not all are worthy of our hard earned money. There are many plans and funds out that simply don’t perform well. Any help you receive as you establish your 401k will most likely be provided by partial salespeople for the investment company who are all on commission to sell their products.

When you do contribute to a 401k, you are using pre-tax dollars. If you need to make an early withdrawal (before age 59), therefore, you will be penalized and taxed at your regular rate.

If you should change jobs, don’t forget about your 401k. Talk to a financial adviser to “roll it over” into a new 401k at your job, or roll into a Roth IRA.

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