IRA and 401(k)
Individual retiement planning is more important now than ever. With Social Security quite likely to change, corporate pensions being reduced and eliminated and the costs pertaining to retirement growing, it is more important than ever for people to take charge of their own retirement. Personal retirement planning through the effective use of IRAs and 401(k)s is a good way to plan for a safe and secure future retirement.
The law encourages older workers to enhance their future retirement by permitting people who are at least fifty years old to add an additional $5,500 to their contribution to their 401(k) plan for a total annual contribution of $22,000. IRA contributers who are at least fifty years old can contribute an additional $1,000 for a total annual contribution of $6,000.
As with any investment, the most important thing is not what you earn by the investment, but rather, what you get to keep. Excessive fees can drastically reduce the value of your IRA or 401(k) that is growing toward your retirement. Additional 401(k) fees of a mere 1% annually can reduce the value of your account by 28% or more over your working career. Basic fees of 401(k) accounts can be increased with things like 24 hour customer service that you do not need. How often do you need to make a change to your 401(k) at two o’clock in the morning. Carefully review the fees you are being charged in your IRA or 401(k) to make sure that you are getting the most bang for your buck.
How should you invest your retirement savings in bull and bear markets is a question that puzzles many people, however, the rules are actually quite simple. Stay invested. No one can time the market and know when to get in and when to get out. Use proper asset allocation and diversification as I describe in “The Truth About Protecting Your IRAs and 401(k)s.” Invest, as I describe in the book, in a manner that is appropriate for your age and the years remaining before your retirement. But stay invested. A study has shown that from 1926 until 2004 95% of the total dollar returns in the stock market were earned in just 5.1% of the months in that 78 year period. If you try and time the market you will be too late and miss many of the gains.
You also should consider a Roth 401(k) if it is available to you at work. Wtih a Roth 401(k) the money that you invest is after-tax money, but the money that you take out of your Roth 401(k) will always be tax free. In addition, people who would otherwise be inegligible for a Roth IRA can be eligible for a Roth 401(k) into which they can annually put more money to grow tax free than they could with a Roth IRA.
Another technique described in “The Truth About Protecting Your IRAs and 401(k)s” is the “stretch IRA” through which you can pass on the benefits of tax deferred or even tax free accumulations of retirement funds for multiple generations.
And as long as we are talking about the next generation, another technique I describe in “The Truth About Protecting Your IRAs and 401(k)s” is the use of a Roth IRA for children as young as seven years of age who can earn wages and contribute to a Roth IRA. A child who annuallycontributes $5,000 to a Roth IRA between the ages of 7 and 18 and never made another contribution would have $2,407,723 at age sixty assuming 8% interest compounding over the years. And this money would be available totally tax free.
One of the worst decisions that you can make is to cash in your 401(k) when you leave your job if you are under the age of 59 1/2. In that case, you would be required to pay income taxes as well as a penalty for an early withdrawal. But worst of all, you would lose the benefit of that money growing tax deferred. A thirty year old with $20,000 in his or her 401(k) who took the money rather than let it grow until, for instance, age sixy-five would lose thirty-five years of compounding tax deferred growth which at a historic 10% growth rate would cost him or her $560,000 at retirement.
Knowledge is the key to using IRAs and 401(k)s wisely. But whom can you trust? Many people who are advising you about your IRAs and 401(k)s are seeking to get a hold of that money to invest on your behalf and charge you fees. Always be wary of “free advice” from someone who stands to profit from working with you. You can become a savvy investor if you learn the lessons in “The Truth About Protecting Your IRAs And 401(k)s.
