| How to Max Out your 401(k)
Plan
(August 13th, 2009)
 When
saving for retirement, the most accessible option that millions
of Americans have in their disposal is the 401(k) retirement plan.
Added to that, most employers offer matching contributions on behalf
of their employees where they contribute say 50 cents on every 1
dollar you contribute to the plan. The money you contribute to the
401(k) plan now will be available for you during your retirement
years and will supplement your other sources of retirement income.
In this article, we discuss the 5 step procedure that will enable
you to max out your 401(k) plan so that you can have maximum savings
upon retirement.
1) The first step is to gather knowledge about
your 401k plan. Some of the typical answers you should have about
your plan include:
• Who is the 401(k) plan provider?
• What investment options are available, example what types
of mutual funds can you invest in?
• Who is the plan administrator, and who can guide you to
sign up with the plan.
• How much is the employer matching contribution and what
are the rules on vesting & years of service required before
all matching contributions are vested?
2) To max out your 401(k) plan, you need to set
a contribution rate which could be for example $300 a week or say
15% of your monthly income. These contributions will come out of
your pay check “pre-tax” meaning that these dollars
going in to the plan will not be taxed as income. You will not have
to pay taxes on these contributions until you withdraw these funds
upon retirement. For the year 2009, you can contribute $16,500 to
your 401(k) as that is the maximum set limit, and if you over the
age of 50, you can contribute an additional $5,500 making the total
come out to a whopping $22,000! Thus, if you need to contribute
$16,500 in a 12 month period, then it works out to ($16,500 / 12
months = $1,375 per month). Thus in order to reach this target,
you will need to contribute $688 bi-weekly from your pay check.
3) If you currently do not have a 401(k) plan
but would like to get started soon, then you will need to squeeze
as much as you can from your bi-weekly payroll deductions for contributions
to your 401(k). Also, you will have to make sure you take as much
of company matching contributions as you can. For instance if your
company matches say 60 cents for every $1 you contribute to your
401(k) plan up to a maximum of 10% of your annual salary, then you
need to make sure you contribute a minimum of this 10% of your annual
salary to take full (100%) advantage of employer matching contributions.
This way, you will be contribute 160% to your 401(k), with 100%
coming from your pocket and 60% coming from your employer (remember
the 60 cents on every $1 rule).
4) After setting options to max your 401k accounts,
you will want to review your investment options and make smart and
informed investment choices. Some 401k plans allow you to choose
very conservative investments such as Guaranteed Investment Certificates
(GICs) to very aggressive stocks such as penny or blue chip stocks.
To meet your investment objectives, it is advised you talk to your
financial advisor for support & advice, as well as the 401(k)
plan administrator in charge of investment selections.
5) After completing steps 1-4, you will feel
the power of compounding making your money grow very fast, especially
if you are getting a good employer matched contribution. The sooner
you start investing in your life, the more retirement nest egg you
will have when you stop working and rely on your 401(k) funds to
support your lifestyle.
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