When I posted recently on how to choose whether to fund your 401(k), Roth, or traditional IRA, I forgot to mention another category:  the Roth 401(k).  The Roth 401(k) rocks.  Like a Roth IRA, you put money in post-tax but then (in retirement) you take out the funds (plus appreciation!) without tax.  Unlike a Roth IRA, there is no income limit to be eligible to contribute.  For a Roth IRA, contribution eligibility phaseouts begin (for 2009) at $105k for singles and $166k for married folk.  Only about 20% of employers’ 401(k) plans offer the Roth option, but the percentage is growing.

If your employer offers a both a 401(k) and a Roth 401(k) and matches both, you might consider dividing your contribution equally between the two, to hedge against future changes in your tax rate.  Your tax rate might change if you make a lot more (or less) money or because Uncle Sam decides to change the rules.  Either way, it’s a good idea not to have all your eggs in one basket. Continue Reading »

There are three types of retirement investment accounts for employees: 401(k), Roth IRA, and the traditional IRA.

If your employer offers a match to your 401(k) contributions, then your first priority should be to contribute enough to the 401(k) to maximize any employer match. For example, your employer may offer to match 50% of the first 6% of your salary that you contribute. If your salary is $50,000, and you contribute 6% ($3,000), your employer will match half, or $1,500, for a total of $4,500 in your retirement account. You don’t pay income tax now on either the contribution or the match, but you will when you take it out (plus any gains) during retirement. The idea is that you’ll then be in a lower tax bracket, so you save on taxes. (I’m not sure I believe we’ll be at a lower tax bracket in retirement, but I’ll leave that argument for another post).

Fewer companies are matching these days, and it may be a benefit on the way out, but as long as it’s there, take full advantage of it — it’s free money.  Continue Reading »

This weekend, the Boston Globe had an article on a change made to 401(k) investment plans during the Bush administration.  The change enabled businesses to automatically enroll employees in the retirement plan — employees would have to take action to opt-out.  In addition, if the individual didn’t specify how to invest the funds, they would automatically be invested in stock-heavy funds.  The Globe article estimates that 1-2 million workers were affected by the new law, and of course with the markets in a free fall, these employees have lost much of their initial investment.

This origin of this change was the Pension Protection Act of 2006.  The Act changed many things about pensions and retirement accounts, including creating the default opt-in for 401(k)’s.  It would seem to be a good idea — to give a bit of a push to those folks who are reluctant to fund their retirement accounts, presumably out of procrastination or trepidation.  The default investment was determined by “Section 624(a) of the Pension Protection Act directed that such regulations provide guidance on the appropriateness of designating default investments that include a mix of asset classes consistent with capital preservation or long-term capital appreciation…”  In other words, the default was a conservative investment.  Fast forward to December 10, 2008 and the swift pen of the Joint Committee on Taxation, p. 12, relieved the restriction on default investments.  Hmmm… that was about 41 days before Obama took the reigns.  D’ya think maybe there was just a wee bit of lobbying going on by the investment powerhouses? Continue Reading »

If your employer offers a match to your 401(k) contributions, then your first priority should be to contribute enough to the 401(k) to maximize the match.  Fewer companies are matching these days, and it may be a benefit on the way out, but as long as it’s there, take advantage of it.  It’s free money; don’t leave any on the table. Continue Reading »