If you're lucky enough to work for a company that offers a 401(k) or 403(b) retirement plan, make sure that you take full advantage of it. Here are some tips:
If you're eligible to participate in your employer's 401(k)/403(b) plan, there's really no excuse for not doing so. At the very least, contribute a minimal amount--you can always increase your contributions at a later date.
Don't put off participating--the sooner you begin, the longer your contributions have to grow. And since your contributions are automatically deducted from your paycheck, it's a lot easier than you think.
Contribute as much as you can afford
Contributions to a 401(k)/403(b) plan are made with pre-tax dollars. For example: If you're in the 25% federal income bracket and put $1,000 in your 401(k)/403(b) plan; you have actually saved $250 in taxes. Meaning instead of contributing to your 401(k)/403(b) you could have $750 now in net pay and pay taxes of $250. But wouldn’t it be even better to invest the entire $1,000 in your 401(k)/403(b)?
Another benefit of 401(k)/403(b) plans is that funds in a 401(k)/403(b) are tax-deferred until withdrawn, increasing your ability to accumulate funds for retirement. It all boils down to this: you should contribute as much to your 401(k)/403(b) as you can afford, subject to plan limits.
Take advantage of any employer match
Some employers match a percentage of each participant's 401(k)/403(b) contributions, up to a specified limit. Even if you can't contribute the maximum amount allowed under the plan, or perhaps even as much as you'd like, you should contribute at least enough to qualify for the full amount of any matching contribution.
For example, your employer offers a 100% match on all your contributions each year, up to a maximum of 3% of your annual income. If you earn $60,000, the maximum amount your employer would contribute each year is $1,800. So even though you contributed just $1,800, you would end up with $3,600 in your 401(k)/403(b). If you didn't contribute the full $1,800 in this example, you've effectively rejected free money.
Pay attention to your investment choices
Don't make the mistake that many individuals do -- choosing their 401(k)/403(b) investments when they begin participating and then never looking at them again. You should review the performance of your plan investments on a regular basis (at least annually), and make sure that your investment mix still fits your financial goals, timelines, and tolerance for risk.
If you don't have the time, knowledge, or confidence to do this yourself, consider working with a financial professional who can help you evaluate your investment options.
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The foregoing content reflects the opinions of Lawrence Financial Planning, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will recover or react as they have in the past.