52 Simple Ways to Manage Your Money – 34. Tomorrow Is Almost Here – Deferred Compensation/401(K)
What it is…
A retirement savings plan for employees, set up by their employer, with restrictions on the investment options available. Some plans include employer contributions; others involve only employee contributions.
The money grows on a tax-deferred basis. Taxes are paid on the money at the time of withdrawal. The investment generally must remain in the account until age 50 1/2 and you must begin withdrawing the money by age 70 1/2 – If you withdraw the money earlier, it is subject to a 10% penalty imposed by the IRS.
There may be additional penalties imposed by the investment company through which you (or your employer) invest.
How it helps …
Allows you to save money on a tax-deferred basis.
Provides for additional income at retirement. 9 Provides current tax savings.
Contributions are pre-tax, which reduces your current income for tax calculation.
Key items to look for…
A competitive return.
The amount of risk that you can live with.
A conservative investment, since losses are not tax-deductible.
Costs, penalties, and procedures for borrowing or withdrawing contributions.
Time…
Three hours to investigate investment options (less if you hire an advisor).
One hour quarterly to review and evaluate.
Keys to action…
Review goals and priorities.
Determine the amount (after taxes) that you can save.
Evaluate investment options by yourself, or with a professional.
SET IT UP
Check with your employer to find out if such a plan is offered.
STEP ON IT
Review your tax material and determine what type of advantage you would gain.
STEP ON IT +
Review other retirement plans to judge their value within your overall program.
Notice…
Your reaction to planning for tomorrow.
Your willingness or resistance to take action.
But what if…
I need the money?
- Although you always have the option to stop future investments, withdraw this money only as a last resort.
Thought primers…
Planning for tomorrow means ..
If I have to forgo buying something today…
The good thing about taking responsibility…
Finding a balance between today and tomorrow…
When I think about making choices and living by them…
If it’s true that I have to take care of myself…
