July, 2009 Tax Tip
Should You Stay With Your 401k?
In this crippling economic recession those with employer 401k plans have probably given much consideration to quitting the plan. In the past year many employers have stopped or reduced matching employee contributions which had been arguably the most attractive benefit provided to participants. If you are still hanging on, the purpose of this month’s article is to provide some items for you to consider before making the decision to either bail or to continue contributing fresh money to your employer’s plan.
Federal law allows much greater contributions to 401k’s than to Roth or regular IRA’s. The 2009 maximum contribution to a 401k is $16,000, while only $5,000 can be put in an IRA. If you’re 50 or older the limits are $22,000 and $6,000.
If your company still matches part of your contribution, you can contribute enough to get the match, which is free money. You can invest the rest elsewhere. Keep in mind, however, that if your income exceeds certain limits you may be precluded from deducting a contribution to an IRA if you are a participant in an employer plan.
The load and other costs as well as administration fees passed on to you as a 401k participant are likely to be higher than you would pay for an IRA.
You can self direct your investments in an IRA, whereas you are generally limited to various types of mutual funds in a 401k. Virtually no company plan offers the opportunity to invest in such items as gold bullion and currencies. This is readily available with exchange-traded funds which can be bought through a broker in a regular trading account, or an IRA. This makes a brokerage IRA more flexible than an employer 401k. *
Mutual funds are only as good as the people who manage them. The majority of funds don’t do as well as the indexes they follow, which is due to lackluster management and excessive fees.
IRS will not normally levy on a 401k, but it can if there is no reasonable alternative to collect the tax. Therefore, you may wish to consider the value to you of having this reasonable safe guard on your account.
Being realistic, you can’t depend upon your employer or the government to fund your retirement. Therefore, many investors are establishing investment accounts that invest in stocks that produce a regular monthly income. *
It has been shown that a large percentage of people who have left their 401k’s because the company did not match or suspended matching did not continue to save. It is easy to rely on the automatic payroll deduction as it is probably already in your budget, but being regimented enough to regularly fund a new account requires some serious discipline. *
401k’s and regular IRA’s may not be prudent for some in the long run. Consider that we are presently at historically low tax rates. Deferring low taxes now for almost assuredly higher taxes later could be poor planning. *
* You are strongly advised to discuss this item (as well as all financial matters) with your financial planner or advisor.
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