From
Your Perspective:
Retirement catch-up for late starters
Max out 401(k) contributions
One of the simplest and potentially most rewarding ways to save for retirement is by participating in an
employer-sponsored retirement plan,
such as a
401(k),
if your company offers one and you are eligible. It’s usually smart to
make the biggest contribution you’re eligible to make each year.
401(k)s let you put money from your
pretax salary
into a
tax-deferred
investment account that you control. The plans offer the double benefit
of current tax savings — because your contributions reduce your taxable
salary — and tax-deferred investment growth, since you don’t pay taxes
on either contributions or earnings while you’re building the account.
In return for this tax benefit, you agree to pay a 10% early withdrawal
penalty if you take the money out of the plan before you’re eligible — usually
not before you turn 59 1/2 or retire.
For
2008, the maximum contribution is $15,500, though your employer’s plan
may limit your contribution to a certain percentage of your salary.
Your contribution may also be limited if you’re considered a highly
compensated employee (HCE) because you earn $105,000 or more. If that’s
the case, the amount you’re eligible to put in is based on what
lower-paid employees at your company contribute. But if you’re 50 or
older, you can make additional catch-up contributions of $5,000
to boost your account value, if your employer’s plan allows it.
Many
employers will also match your contribution, or add money to your
account up to a limit. A typical formula is to match 50% of what you
put in, up to 6% of your salary. If you can’t afford to invest the
maximum in a 401(k), experts suggest you contribute at least enough to
take full advantage of any company match.
If you’re like the
average full-time U.S. worker, you’ll change jobs 11 times
in your lifetime. Fortunately, your 401(k) assets — both
contributions and earnings — can move with you when
you leave your job. For instance, you may be able to
roll
over
your 401(k) into your new employer’s plan, invest your 401(k) assets
in an
IRA
of your choosing, or take a cash distribution. But you’ll want to make
sure you understand all the rules and weigh all of your options
carefully to make the choice that’s best for you.
