Choices
Getting Started
There are several ways to get started investing. Again, the main thing is to just do it! Remember getting started early will mean financial freedom!!
- Through your employer with a 401k plan or, if you work for a non-profit, a 403b plan
- Through a Traditional IRA, Roth IRA
- Through a brokerage account
- Through a direct stock purchase plan or dividend reinvestment plan (DRIP)
Retirement Contribution Effects on Your Paycheck
Investment Options in the Workplace: 401(k)
If you are working for a company that offers you investment plans, that is one of the easiest ways to get started. You just invest each payday with small amounts deducted from your paycheck.
A 401(k) plan is a company retirement plan that allows you to defer (put –off paying) taxes on some of your income. It is often called a defined contribution plan because you define how much of your earnings will be diverted to the 401(k) plan. In other words, YOU decide how much to invest each payday! The maximum that can be contributed in 2008 to your 401(k) plan, as set by the IRS is $15500. If you are over age 50, you can contribute an additional $5000. These are the IRS limits, but you are also subject to the limits imposed by your company’s 401k plan.
This plan may also be referred to as a 403B or 457 plan. These are very similar to the 401K, but are available through non profit and government employers.
401(k) Advantages
- Contributions are not taxed, so you will pay less income tax now.
- Investment earnings grow tax free
- Extra money from your employer if they offer match.
You can often get started with as little as $10/ paycheck. You can increase the amount you contribute as your salary increases.
Money can be withdrawn at age 59 ½ without penalty. When you take out the money, you pay federal income taxes.
Free Money!
Your employer will sometimes match a portion of the money you put in your plan. For example, a company might contribute 
a 50% match of what you defer up to 5% of your salary. If you make $20,000 a year, they would contribute 50¢ for every dollar you contribute, up to $1,000 – and that’s like getting free money for investing!
For example, Lisa works for the ABC Company which will match her investment contributions dollar for dollar up to 3%. She is paid every two weeks and wants to take advantage of the FREE MONEY! She contributes 3% of her $20,000 salary or $600 per year. That is only $23.08 per paycheck. The ABC Company also contributes $23.08. After 5 years, she will have contributed $3000 but her account will have $6810.12 (at 5% interest) or even more!!!!!
Vesting and Matching Funds
Q: Is the money the employer contributes mine to keep?
A: Matching funds from your employer are yours to keep after a vesting period. For example, a company may have a five year vesting period. That means if you leave before the five years are up, the company keeps their matching funds. But if you stay for at least five years then the matching money is yours.”
Remember: the money you contribute is yours to keep.
Use this calculator to see how much you'll end up with...
How fast will your money grow with an employer match?
401(k) Basics
Keep in Mind- If you withdraw the money before age 59 ½ you may have to pay a 10% penalty and you will have to pay taxes on the money withdrawn. You may be able to avoid the 10% penalty if the money is withdrawn for a medical emergency or a first time home purchase.
- Your money is invested in mutual funds, which may contain company stock.
- You will be offered several funds to choose from with varying levels of risk and diversification.
- Your plan administrator can tell you about your options.
- You may move money between funds to increase returns or reduce risk.
Roth 401(k)
The Roth 401(k) is a fairly new investment product. As the name suggests, a Roth 401(k) combines features of the traditional 401(k) with those of the Roth IRA. It's offered by employers like a regular 401(k) plan, but as with a Roth IRA, contributions are made with after-tax dollars. While you don't get an upfront tax-deduction, the account grows tax-free, and withdrawals taken during retirement aren't subject to income tax, provided you're at least 59 1/2 and you've held the account for five years or more.
Roth 401(k) accounts are subject to the contribution limits of regular 401(k)s — $15,500 for 2008, or $20,500 for those 50 or older by the end of the year — allowing individuals to stock away thousands of dollars more in tax-free retirement income than they would through a Roth IRA. (In 2008, Roth IRA contributions are limited to $5,000 a year, or $6,000 for those 50 or older.)
An employer can make contributions on your behalf, but they are made with pretax dollars and cannot be made into Roth account or receive tax treatment. The match accumulates in a separate account that is taxed as ordinary income at withdrawal.
One money is contributed, it cannot be easily withdrawn prior to retirement without penalties, but the funds can be rolled into a regular Roth IRA upon employment termination.