401K » Retirement Plans

Planning for your retirement is one of the most important things you need to address. When you retire you're no longer working, and that means you need to think about how you'll get by without any income. Two of the most popular ways of planning for retirement are through 401(k) plans and IRA accounts. These two investment vehicles feature different details and incentives in order to get people to save a portion of their income and set it aside for their retirement. Both IRAs and 401(k)s have their pros and cons, and if you're going to choose one as your retirement planning strategy you need to be as informed about your decision as possible.

An IRA stands for "individual retirement account." You can get access to an IRA either on your own or through your employer, but by and large IRAs are investment vehicles that you set up on your own. When you put money into an IRA, you are putting it into a fund which can then be invested in order to generate more cash. While you're in charge of everything that happens with your IRA, you're also on your own, and all the money that goes into it comes out of your income.

A 401(k) plan, on the other hand, is a very popular investment vehicle because it's offered by employers who will often make contributions to your 401(k) based upon a certain percentage of your salary. Everyone likes the idea of their employers throwing in extra money to their retirement fund, so the 401(k) plan is easily one of the most popular investment strategies in America today. Like the IRA, 401(k)s have different tax issues which you need to be aware of. For example, if you're making pre-tax contributions to your 401(k) or IRA you will have to pay taxes on your income later. If you make after-tax contributions to either one you're going to have less money in your short term, but when you are legally able to access the money in your 401(k) or IRA it will be all yours, free and clear.

Both 401(k)s and IRAs are meant to be spent only when you retire. So, if you access the money in either account before you reach the legal age to withdraw the money, you will be heavily taxed and penalized for early withdrawal.

To learn more about 401(k)s and IRAs, make to sure to read through the different retirement accounts to decide which one is right for you. Also, by speaking to a financial advisor you will get more in depth detail about the different retirement accounts that are available to you.

If you're afraid to look at your 401K statement this quarter, you're not alone. The recent stock market nose-dive has taken its toll on the retirement savings of millions of Americans, and you probably don't need us to tell you that your portfolio hasn't been performing well. But what you might not know is that for most people, your average 401(k) portfolio is not the most well-rounded portfolio you can get. In fact, there are five common problems with the average American's 401(k) plan that might be leaking money from your retirement fund. Take a look at these and see if any of them sound familiar.

1. The Useless Tax Deduction
   The main selling point of a 401(k) plan is usually the tax shelter it provides by making your "pre-tax" income contribution earn interest. However, many people don't realize that the tax on that income is only deferred until retirement. When you take that money back out of your 401(k), you will be paying tax on that money, as well as the interest it accrues. For workers in entry-level jobs, or those in low tax brackets who don't pay a lot in taxes anyway, it might make more sense to pay the tax now and get a Roth 401(k) or Roth IRA. Unfortunately, less than 21% of 401(k) plans offer the Roth option, according to the Profit Sharing/401(k) Council of America.
2. All Large Caps
   One of the most common complaints about 401(k) plans is that their investment portfolios are weighted heavily in the same types of investments: large-capitalization U.S. stocks. These are exactly the types of stocks that tanked in the last year, dragging down many people's retirement hopes along with the market. A more diversified portfolio, featuring small-cap American and foreign stocks, commodities, or specialized bear market portfolios would be a better bet, but unfortunately its rare to see these choices in most standard plans.
3. All Bonds Are Not Alike
   Your typical 401(k) may have up to 20 stock fund choices but only one bond fund and chances are that bond got hit hard by falling interest rates this year. But have you heard of inflation-protected bonds? Treasury inflation-protected securities, or TIPS funds, grow your money at a rate to beat inflation. Trouble is, most 401(k) plans don't offer them.
4. Using your 401(k) as an ATM
   Some employers allow you to take out low-cost loans against your 401(k) balance, and some even go so far as to make that loan amount available as a debit card. While borrowers may rationalize using the loan as "paying interest to yourself," the fact is you are using the money that could be earning returns as an investment, and sacrificing the compounded interest that is supposed to build your nest egg.
5. Rollover Rights getting Rolled Over
   The Employee Retirement Security Act, or ERISA, is supposed to allow employees near retirement age the ability to roll out of their current 401(k) and into an IRA plan. These are called "in-service rollovers." However, some plans discourage or even forbid these in an attempt to keep assets within the company plan. If you find yourself in this situation, contact your plan's investment committee. And if they are not responsive, you have the right to complain to the U.S. Department of Labor.

Now that you know some of the set backs of 401(k) plans - make sure you get the best advice from a financial advisor so that you can pick the right type of investment for your 401(k) plan if you are allow to choose what kind of investments you can pick from. On that note, find out the best retirement account that will fit your retirement needs.

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