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401(k) Intro: Is Your Retirement Plan Foolish?

It's no secret that when it comes to retirement, you're on your own, Fool. Traditional pensions -- where employers send retired employees a check every month for the rest of their lives -- are increasingly rare. As for Social Security, the average benefit is less than $13,000 a year, and we'll see what happens to that when the future funding problems become present funding problems.

No, Fool, if you want to retire, you're going to have to do all the saving and investing yourself. For many Americans, the best place to start is with the defined-contribution plan at work, whether it's called a 401(k), 403(b), 457, SEP, or SIMPLE IRA. Taking advantage of such accounts is a great way to sock away thousands of dollars, with all kinds of tax benefits to boot.

But just because your employer offers a retirement plan, that doesn't mean somebody in your office will tell you what to do with it.

Enter the Fools. We're happy to share our knowledge about employer-sponsored, self-directed retirement plans, and in this tidy little collection we very much believe you'll find out everything you need to know about yours. In fact, for the truly lazy, we've packed all the real information into the first 100 words of the first step. How's that for brevity?

But, hey, we realize that there may be some individual questions that aren't covered in this concise little package. So if you've read our whole collection here and still wonder, "Hey, what's up with my plan?" -- then give our Rule Your Retirement service a try free for 30 days. You'll get access to special retirement discussion boards, plenty of good advice about how to invest your money, and some cool, whizbang financial-planning tools.

In the spirit of the aforementioned brevity, we will henceforth use the term "401(k)" when discussing employer plans. However, we recognize that you may have a different type of plan. The vast majority of our advice will still apply to you, but check in with the HR guru in your office to find out the particulars (especially contribution limits and employer matching arrangements) of your plan.

And now it's time to learn how to use these accounts to improve your retirement prospects.


Read/Post Comments (35) | Recommend This Article (232)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 28, 2009, at 9:50 AM, excaliburmini wrote:

    years ago my wife entered into a 403b tax shelterd annuity with Met Life, we needed money for college and borrowed on this plan...we were unable to pay off the loan completely and have been charged interest on our money to this day...it is also impossible to cash out of the plan, pay off the $7000 of accumulated interest to Met Life and remove the funds, pay the penalty and taxes to the IRS.

    Is this a common plan? Today I am sorry we did not let a lawyer look at the fine print...no company should be allowed to keep your money against your will. I would love some feedback,if others were caught in a plan like this

  • Report this Comment On March 09, 2009, at 2:37 PM, dammbit wrote:

    I am pretty much in the same boat as Excalibur. I have a 401K through my employer, and no way to pull my money out of it or close it unless I quit my job. obviously, in this economy, being jobless is not some place I wish to be....

    From my understanding there is no way to remove your money legally from a plan like this, but I am not the expert. I'd love to find out for sure what is right. I think I could do better with my money than the paltry funds made available to me through the plan my employer has set up.

  • Report this Comment On March 25, 2009, at 11:21 PM, AnnuityWizard wrote:

    Check your employee handbook for what is called a "non-hardship inservice withdrawal."

    Some companies have it and some don't. It will be buried in the fine print but if present will allow you to withdraw funds but usually only to the amount you contributed. Sorry, employer match isn't included.

    Good luck

  • Report this Comment On April 06, 2009, at 12:11 AM, eileen1023 wrote:

    we have 10.000 that we would like to invest in the "The only Oil Company you will need to own"

    Has this info been made available to us Fools

  • Report this Comment On July 26, 2009, at 8:06 AM, LGFFool wrote:

    This is a great article for "this part" of your retirement planning.

    The people that laugh at social security and think they have enough for retirement with their 401k will have a difficult time in retirement.

    These days you must have a regular steady investment in both your 401k and either a Roth IRA or traditional IRA so that you have enough at retirement.

    You can join our free Facebook group "Live The Lifestyle Your Family Deserves" if you like to learn more on saving and investing. Just search Facebook for "Live The Lifestyle Your Family Deserves" and click on "become a fan" for instant access.

    You can't take anything for granted these days. You can also check out www.middleclassmoney.com for more on the ways to get ahead in this economy.

    We are for staying positive, but it pays to be on the right track. The people developing their own plan for getting ahead, staying away from fees and being serious about regular and automatic savings will get ahead while others fall behind.

    Thank you.

  • Report this Comment On September 01, 2009, at 3:52 PM, tradingmarkets wrote:

    In a deflationary crash, cash and cash equivalents such as short term treasuries is the place to be. Credit bubble was inflated for 50 years. Almost all money in the economy is bank credit. It has principle + interest that needs to be paid back. It is going to deflate in a terrible way! Watch your 401k. Stocks, Gold, OIL, housing, everything will go down.

    Look how over valued the stocks are:

    http://www.tradingstocks.net/html/near_bottom.html

    Prechter explained the problem years ago. Must read:

    http://www.tradingstocks.net/html/forecasting.html

    Wait before you jump into stocks. There will be the buying opportunity of 400 years. Your children, their children, grand grand children will thank you.

  • Report this Comment On November 27, 2009, at 8:33 AM, nucat60 wrote:

    I recently left a job and am wondering if there is any way to access the non-vested balance of my former 401k? I know the standard answer, but there has to be a way.........

  • Report this Comment On April 16, 2010, at 3:25 AM, soheilkh wrote:

    salam

  • Report this Comment On July 04, 2010, at 12:15 AM, mikefransen wrote:

    More on 401(k) facts, fiduciary duties, fees, and regulatory efforts to force disclosure at ERISA -Shmerisa! (http://shmerisa.wordpress.com)

  • Report this Comment On September 17, 2010, at 1:27 AM, sunitachourasia wrote:

    I don't think that Retirement plan is foolish coz when we ll be 50-60 yrs old and there is no1 who can support us then this retirement plan helps us a lot. Man does not loss his self respect and self confidence. "Money hai to honey hai", that means if u have money in your old stage then any1 ll ready to help you.... so retirement plan is best for the people!!!

  • Report this Comment On November 22, 2010, at 2:10 PM, jbarnes1217 wrote:

    I have $165k in a previous company's 401K. Would it be wise for me to take that money, put it in an IRA and dedicate all, most or a % of it to the Million Dollar Portfolio?

    Any advice is very much appreciated!

    Thanks!

  • Report this Comment On November 22, 2010, at 2:11 PM, jbarnes1217 wrote:

    As a follow-up to my above question, I don't need to touch that money for 20+ years.

  • Report this Comment On June 03, 2011, at 11:35 PM, scheideckerj wrote:

    What are the drawbacks (if any) to putting 403-B funds from former employers into an IRA?

    Also, I am 58, and wonder whether it makes sense to convert to Roth IRA. The last time I did it, I paid a boatload in taxes. My income would make that happen again, but I plan to retire in a couple years--can I do it after 59 1/2?

    I plan to live to 90.

  • Report this Comment On June 07, 2011, at 12:48 AM, DanWetzel1 wrote:

    I hope I live to see a need for a retirement account...

  • Report this Comment On August 07, 2011, at 6:50 PM, akwoman101 wrote:

    What is the diff btw a 401k and an IRA (or Roth IRA)? If I have a 401k, what is the advantage of having a Roth IRA, also? Because of my low income, I can afford to contribute only so much, so it's not like I have a bundle of money to do something with and need to find diff places to stash it.....(unfortunately).

  • Report this Comment On October 08, 2011, at 10:32 PM, retireewannabee wrote:

    Ak,

    401k is offered thru employer. the money goes from top of your paycheck (gross, before taxes) into a savings plan. it artificially lowers your ann income for tax purposes.

    IRA is do-it-yourself or offered thru brokerages, banks. Many options, varieties. This one is line-item deduction on your 1040 at tax time.

    Both 401ks and IRAs grow tax-deffered, meaning, you don't pay tax on that money until you take it out. after age 59.5 preferably (to avoid taxes, penalties; there are exceptions)

    Roth IRAs are a different matter. money contributed is after tax, so you do not pay tax on that when you take it out and it also grows tax deferred (no tax bill on growth).

    What should you do with few dollars to invest?

    If a 401k is available to you, do that. it's the best tax shelter and often, your employer will match your contributions, so you can make each investment larger with their help. annual limits are above 10k, so probably like me, you'll never hit the ceiling.

    IRAs, traditional and Roth, have annual limits that are lower. something like 5-6 k a year, plus provision for age 50+ catch up. Please note, that limit is the max for contributions to all IRAs you have.

    for example, I have a traditional AND Roth IRA. I can only contribute the annual maximum, regardless of how much goes to which.

    hope this helps.

    Roth is different

  • Report this Comment On December 19, 2011, at 8:38 PM, FoolishDoug wrote:

    How much money do all companies deposit each week for all employee/employer 401K contributions in the US?

  • Report this Comment On December 20, 2011, at 8:03 PM, xxbrainxx wrote:

    Not Enough!

  • Report this Comment On August 01, 2012, at 10:59 PM, shepa005 wrote:

    Do you know if I can roll over a 403b into a 401k? It's through the same employer.

  • Report this Comment On December 17, 2012, at 8:34 PM, clippership wrote:

    would it be best to roll over a 457plan from a job I left into an IRA or a Roth?What is a good brokerage to invest with?

  • Report this Comment On April 07, 2013, at 10:38 AM, RUSHmusic wrote:

    My company just got sold and the new company instituted a new administrator for our 401k. My money is still with the old provider. The problem, now, is that the new provider will charge a $50 fee per year for administrative costs. The old provider was ING Direct and the new provider is Fidelity. Is there a way to move my 401k plan to another company without getting hit with a 20% income tax and still funding my account?

  • Report this Comment On April 09, 2013, at 8:21 AM, texakomie wrote:

    I was just force retired from a company where I have a 401k account. I am considering rolling it over to an existing IRA account with another broker. However, I want to know if I leave the funds at my account with the former employer will I still have to start taking required mandatory distribution since I am 74 and already taking RMD from another IRA account at another firm even though there will be no additional contributions?

  • Report this Comment On May 25, 2013, at 1:24 PM, 4mikie wrote:

    Interesting that the guberment will fine you if you do NOT buy health insurance, but won't give you a break if you have a healthy lifestyle, have a great BMI or do anything to IMPROVE your health.

    As usual, they're in the pockets of the AMA and the drug companies. There's just no money going to them if people were healthy.

  • Report this Comment On June 15, 2013, at 7:54 AM, michwen wrote:

    With technology moving at light speed, there are fantastic tools to help you with your investments and investment selections.

    It all starts with you, your goal your money and your plan. I believe that technology driven algorithms outperform any broker/ investment advisor anyway.

    I personally use a company www.jemstep.com

    No doubt they do the heavy lifting and give me the confidence to make smart investment decisions.

  • Report this Comment On June 19, 2013, at 6:41 PM, Eisenach wrote:

    Hello fellow Fools, I need help optimizing my 401k accounts. I just started a new career and their 401k is through Fidelity. My former company's 401k was through Vanguard (42% of total retirement between the 2 accounts). My question is should I leave the money in the Vanguard account and just forget it, while I feed the Fidelity account. Or should I consolidate the Vanguard account into the Fidelity that is currently being fed by my direct deposit?

  • Report this Comment On June 22, 2013, at 3:42 PM, gbadeb wrote:

    Eisenach, the answer depends on what funds are available in each account, and on whether you feel comfortable with the risks and returns of each one. If you like your Vanguard choices, keep them! Roll them into a Vanguard IRA if you wish to contribute more; rebalance as needed. ALSO feed the Fidelity account at least up to the company match, concentrating in funds that do not duplicate your Vanguard funds.

  • Report this Comment On August 31, 2013, at 11:52 AM, vfunkhou wrote:

    It seems that most people are asking about how to work toward retirement. I have a question about what to do after retirement. My 401K from the government requires starting to pull money out at 70 1/2 years. That gives me about 4 years to decide what to do with the 500k I have in my 401k. I don't really need the money for retirement but want to keep the money growing for my future requirements. Is there an option for gradually transferring this to a roth or another investment to keep it growing and pay as little taxes as possible?

  • Report this Comment On January 06, 2014, at 4:03 PM, Dumbcluck wrote:

    I have a pension plan that was supposed to be reciprocal to my existing plan, however they will not honor this.

    My question is can I take this non vested pension and rollover to my current plan?

    I have no plans to to return to work there again. I have over 3 years out of the required 5 for being vested there. We are talking about roughly $20k.

    This money belongs to me as I earned it. I would really hate to lose it just because they aren't willing to the right thing.

    Any advice?

  • Report this Comment On January 18, 2014, at 12:50 PM, 401ktactical wrote:

    Another factor to consider is employing an active investment management strategy. The Federal Reserve has already begun tapering its Quantitative Easing program. With the stock market at all time highs, and the latest quarterly earnings coming in average to poor, intelligent investors that don't want to be left holding the bag in their retirement accounts should look into investing tactically. It is easily accomplished in most 401k's, 403b's, and 457.

  • Report this Comment On February 21, 2014, at 4:58 PM, SWFLinvests wrote:

    401k, 403b, 457, and IRA are gone with the dinosaur. If you are still investing in these plans you are behind. Your money is growing tax deferred, Income taxes are going up so WHY would you defer your taxes to the future when they will be higher? Your money is your money so if you are putting your hard earned money into an investment you should not have to jump through hoops to access it in an emergency.

    Last 2007 people lost 40%-50% of their money. Now some may say "well it came back" Yes it did come back however if you put $10,000 in an account and you lose 40% of your money but 6 years later you gain 40% you do not have $10,000 you have $8400. Simple math. I have a solution!

    www.SWFLinvests.com

  • Report this Comment On March 06, 2014, at 12:22 PM, Shawn9i3 wrote:

    I'm really happy to find this site and did enjoy reading useful articles posted here. The ideas of the author was awesome, thanks for the share. Best blog: http://wellsfargolocations.org/

  • Report this Comment On March 13, 2014, at 4:33 AM, semost66 wrote:

    Several comments:

    * I have been contributing to 401K/IRAs for past 30 years. Also, I have reached the point that my investments are in individual stocks rather than funds.

    * For younger folks, the Roth 401K/IRA is probably the way to go. However, do not assume that your marginal tax rate will always be less in retirement - my marginal tax rate has gone down but not enough to change my IRA decisions (at least not yet). I need more than a 3% tax rate decrease to make it worthwhile.

    * Unfortunately, the Roth may not make financial sense for us older folks. Everyone should watch Congress for any changes to IRAs and 401Ks. The President proposed changes to Roth IRA in his latest budget which would make Roth's less desirable in the future.

    * As you begin to accumulate enough savings to make it worthwhile, suggest you set up a brokerage account with two different institutions to hold your Rollover IRA, Traditional IRAs, Roth IRAs, Taxable Accts, 529 Plans, Health Savings Accounts, and/or taxable brokerage accounts. Being the trusting sort (yeh-right!), I did this as a risk reduction measure. I am assured access to some of my money for the months I might be involved in a dispute with the other firm. I use Fidelity & USAA - you pick your own two.

    * For IRA-type accounts, make sure that you have a durable power of attorney which is recognized by that institution. For example, Fidelity requires you to file your POA with them using their own form. Without an acceptable POA, dementia for you could result in your spouse being unable to manage your IRAs until you actually die!! Suggest checking this issue for ALL of your accounts.

    * The IRS limit on 401k contributions (sum of you and your employer contributions) was $51K in 2013. If you have any flexibility here, you might be able to trade less taxable salary for more company contributions. It never hurts to ask.

    * Unfortunately, your 401K money is stuck with your employer until you either quit or turn 59.5. My strategy has always been to move 401K funds to my Rollover IRA any chance I was given. I probably averaged at least one rollover per year for past 20 years. Each of these rollovers were directly between institutions - I never saw a check. I would not recommend rolling one's previous employer's 401K balance into new employer's 401K. Also, I would not recommend leaving one's 401K balance with your previous employer - they do not want it and will charge you for the privilege!! It's your money, and I have always believed that your Rollover IRA (or Roth IRA) is the place for you to manage it.

    * Most of my IRA balance is in Traditional IRAs. My bias is to defer paying any taxes as long as possible. There does not appear much tax benefit for me to convert to a Roth IRA at this point in life.

    * I earlier believed that I could invest post-tax dollars into Traditional IRA and then immediately roll into a Roth IRA in a tax-free transaction. Turns out this is not allowed by IRS because your pre-tax and post-tax Traditional IRA funds are commingled for purposes of computing taxes. Nice idea but no cigar.

    * There was a recent Fool article regarding use of Health Savings Account to accumulate wealth similar to a Traditional IRA. You could use the account to reimburse medical bills, (eventually) buy a house, or convert it into a Traditional IRA at age 65. Suggest this idea is worth investigating.

    * If you are forced to change jobs (i.e., layoff or retirement) and your 401K is partially vested, you might be able to get your employer to give you 100% vesting as part of the severance package. It never hurts to ask.

    * Finally, a tip for the oldsters. We have a credit union account (w/CDs) as our rainy day fund. It finally dawned on me that we could invest some of those CDs into a Roth IRA in the same credit union account. The CD yield is miniscule but the same dollar serves both as Roth IRA and as part of our rainy day fund.

  • Report this Comment On April 09, 2014, at 10:44 PM, vaferalyk wrote:

    My Dad owns an ice cream distributing company, and his employees HATE saving in their 401Ks. Don't they realize how much money they will SAVE in the long run. Massive amounts. Its just set it and forget it territory.

    My Dad on the other hand has whats called a "safe harbor" 401k. He can put away over 50k a year and does religiously. And if he ever had to declare bankruptcy (he won't) its safe from the courts as all 401ks are.

    Hes smart and safe with everything involving finances though. He just helped me and my husband get new LifeAnt insurance policies. I don't know what you all pay but I guess life insurance is only like $25 bucks a month now. Some advisor tried to sell us some $300 a month crap good thing I didnt do it. I wish more people would save to their 401ks and we wouldnt have to pay a ton of money to social security that we wont ever see!

  • Report this Comment On July 02, 2014, at 4:57 PM, SWFLinvests wrote:

    Please everyone you need to read and completely understand your employer sponsored 401k plan. Not only do you have market risk and high fees but when your employer says "matching" you need to completely understand what "matching" means. the money your employer is"matching" is usually vested in an employer account, not your money yet. That money is not your money for about 10-20 years. If you leave that company, you get nothing. Retire on your own terms.

    Contact me for your free evaluation

    www.SWFLinvests.com

  • Report this Comment On July 08, 2014, at 1:34 AM, Stephenmando wrote:

    Retirement plan are good for people who want to live healthy and wealthy life after their retirement. <a href="http://www.1clickdissertation.co.uk/">dissertation services uk - 1clickdissertation</a>

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