How to Benefit From Your Company's 401(k) Plan

Double the amount you save!

Most companies will match 100% of the money you save - up to a certain percent.

The employee must choose a percentage of their salary to contribute to the plan, and the plan spells out the extent of employer matching, if any (regardless of profits). In 2009, investors can contribute $16,500 to their 401(k) plans, and 401(k) investors over age 50 can contribute $22,000.

If contributing the allowable maximum is out of reach for you right now, make sure you're at least contributing the amount you need to take full advantage of any matching money your employer kicks in. Doing otherwise is like leaving free money on the table.

Employee taxable salaries are reduced by contributions.

Your W-2 reported to the IRS will not include the amounts contributed to your 401(k) plan. For example, if you grossed $50,000 income and contributed $15,000 to the 401(k) plan, your W-2 will show income of only $35,000.

Before the January 1, 2006, effective date of the designated Roth account provisions, all 401(k) contributions were on a pre-tax basis (i.e., no income tax is withheld on the income in the year it is contributed), and the contributions and growth on them are not taxed until the money is withdrawn.

With the enactment of the Roth provisions, participants in 401(k) plans that have the proper amendments can allocate some or all of their contributions to a separate designated Roth account, commonly known as a Roth 401(k).

Qualified distributions from a designated Roth account are tax free, while contributions to them are on an after-tax basis (i.e., income tax is paid or withheld on the income in the year contributed).

In addition to Roth and pre-tax contributions, some participants may have after-tax contributions in their 401(k) accounts. The after-tax contributions are treated as after-tax basis and may be withdrawn without tax.

The growth on after-tax amounts not in a designated Roth account is taxed as ordinary income.

When you enroll in your company's 401(k) plan you will be given 20 or so investments to choose from. These investments may include money market, bonds, company stock, and mutual funds. Many companies' 401(k) plans also offer the option to purchase the company's stock. Some companies allow you to have a brokerage account. The brokerage account allows you to purchase stocks and other mutual funds not included in the plan. The employee can generally re-allocate money among these investment choices at any time.

Each pay period a predetermined amount of money will be removed from your check and automatically deposited into the 401(k) plan. You will select an investment and each pay period shares will be purchased. Many companies' 401(k) plans also offer the option to purchase the company's stock. The employee can generally re-allocate money among these investment choices at any time.

The investment choices made during the year will hopefully make money. You do not have to pay taxes on any monies made on these investments. All earnings are tax-deferred until the employee draws the money out at retirement.

Investing in your 401(k) plan improves your ability to have a "Great Retirement."

Thanks to the advice and information provided in the book "Getting Started On Your 401(k) Plan" you are a better money manager and overcame your fear of finance. You will be able to retire early if you want to. Investing a small amount of money today creates a comfortable retirement for tomorrow.

You are now set for life because of your long term investment strategy. You capitalized on the bear markets and bought more shares at a lower price. You chose mutual funds paying capital gains and dividends and earned additional shares without investing additional money. Your money will last throughout your retirement because you know how to leave some in stocks.