401K » Retirement Plans

Times are tough and thousands of Americans are facing financial hardship.

If you are still fortunate enough to have a job and are even luckier to have a 401k plan as part of your benefits package, making contributions to your 401k plan may be the last thing on your mind. However, it is important to maintain these types of contributions as they are an excellent tool for preparing for retirement and depending on your financial hardship, may actually may allow you to keep more of your money than you anticipated.

Should I contribute if I’m filing for bankruptcy?

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.

About IRAs

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.

Many Investors are questioning the 401k Contribution Plan

There was talk not so long ago regarding the privatization of the retirement system for working Americans. That process would have relied more on investment plans like 401ks and IRA contributions and would have lightened the load on the Social Security system. Luckily, that concept never became a popular notion thanks to the economic turmoil. America is experiencing  billions of dollars of net worth lost due to the retraction of 401k investment portfolios. This situation has both investors and financial experts asking “do 401k plans make sense?”

Those who were expecting to retire about this time now have doubts if it was even sensible of them to have created 401k investment plans to begin with. A research by the Employee Benefit Research Institute found that Baby Boomers were hit especially hard by the economic retraction – on average 401k balance declined by approximately 20% in 2008.  Because that figure also includes new contributions, the  Employee Benefit Research Institute believe that the actual investment declines are actually even greater.

You may be surprised to hear that many companies are considering doing away with matching contributions to their employee’s 401(k) plans. Some big companies, including Ford Motors, Bethlehem Steel, and Charles Schwab, have already tried suspending or reducing their 401(k) matching contributions as a cost-cutting measure in the last recession. Though most of them reinstated the perk after 2002, the current crumbling economy has put 401(k) contributions back on the table – and on the chopping block. Current research points to the idea that matching contributions are not necessary in order to lure employees into retirement planning, and that the funds earmarked for 401(k) matches can best be spent elsewhere – in the form of salary raises for all employees, or beefing up health insurance benefits.

However, just because your company is not matching your contribution, there’s no reason not to plan ahead for retirement. In fact, if you were contributing enough into your account to qualify for a matching contribution from your employer, chances are you can afford to open up an individual retirement plan or Roth IRA and arrange to transfer the same amount into it every month, weekly, or biweekly. Roth IRAs have contribution limits depending on how much you make: if your modified adjusted gross income for tax year 2008 is $101,000 or less for singles, or $159,000 or less for married couples, you can make a full contribution of $5000 per year. However, this works out to a little less than $100 a week, or up to $416 a month.

Pension plans are quickly becoming a thing of the past. Less than half of the 100 largest companies in the U.S. are still offering traditional pensions to new employees, and more than 16 companies have froze pension contributions this year. This means that 401(k) plans and other contribution plans will continue to grow, even as 401k plans have received much criticism in light of the worst financial crisis to hit the U.S. in 70 years.

401(k) Plans Require Individual Attention

Making 401k contributions provides a number of retirement benefits, one of which being the ability to gain interest on your account. Most contributors think about the tax breaks they can take advantage of yearly, but being able to gain interest helps to add even more to the nest egg over time.

How You Gain Interest

Before taking the risk of tapping into your 401k to launch a new business, you need to address the risks involved with the undertaking. If you use your retirement money to finance your plan and the business fails, the long term financial damage can permeate to the core. If, however, the business succeeds not only will your 401k be intact but you will experience the perks of being self employed.

The strategy of using your 401k to fund a business launch not only comes with personal liabilities but tax risks as well. The existing tax code is filled with “self-dealing” rules that if not properly adhered to could cost the entrepreneur plenty of money in the form of taxes on the existing 401k (do not forget, that money is deposited on a pre-tax basis).

With layoffs sweeping many companies, including the 401(k) industry, you might be more worried about losing your job or losing the value in your 401(k) portfolio than you are about the staff of your 401(k) fund. But here’s something you might not have thought of: cutbacks also affect your 401(k) fund managers, as well as the people in your own company who keep records and pick stocks and funds for your company’s 401(k) to invest in. Despite bailouts of major investment brokerages, fund houses are going out of business right and left. Should you worry about your 401(k) company going broke?

First, it’s important to understand that – though the value of your 401(k) stocks may plummet in the general stock market downturn – the possibility of your 401(k) plan itself going broke is, according to most experts, very unlikely. Your 401(k) plan is an entirely separate entity, legally speaking, from the company that sponsors it. What this means for you is that even if your company goes out of business, the 401(k) plan as an entity is protected.

You have had some financial highs and lows throughout your life. Sometimes you were able to make the maximum contribution to your 401(k) plan; at other times you needed to keep every dime in your paycheck to handle other, more urgent expenses. Luckily, you can make catch-up contributions to help your retirement savings.

Catch-up contributions is the ability for those 5o and over to make additional savings contributions to their 401(k) and/or individual retirement accounts. To be legally entitled to make catch-up contributions according to the Government’s Thrift Service Plan you must be: