Sharon’s Lastest Column in the Knoxville News Sentinel
If you’re lucky enough to work for an employer who offers a 401(k) and you’ve made the wise decision to participate, congratulations! Especially, if the employer matches your contributions, it’s FREE money!
Even if they don’t match, you’re still saving for your own retirement, so you’ve made the right decision so far. The younger you start the better. I worked with someone who started saving for retirement in their 20s. By the time their children were in college, they had enough in the 401(k), that they could actually stop saving for a few years while they were paying for their children’s college educations.
The value of compounded interest over time really adds up. Saving $1,000/year for 20 years from age 25-45 at a 5 percent return would accumulate to $35,187 at age 45. Then merely leaving that money alone and allowing it to grow at the same 5 percent would mean a balance of $95,451, so starting early really makes sense and cents.
The hard part is deciding what to do if you leave your employer.
First, know that your contributions are always your money. The employer contributions may be subject to a vesting schedule (based on length of employment). Most likely, you can leave your money in the “old” plan, and that is the easiest. However, there is a danger of accumulating too many of these “old” accounts, like losing track of them or paying them less attention. For example, over time you might not know if the accounts are invested properly or remember to update the beneficiary if necessary.
If you change employers, you can usually roll the balance from the “old” plan directly into the “new” plan and have no tax consequence. This is advisable if you are going to participate in the new plan so that you can keep track of your investment selections and beneficiary designations.
Alternatively, you can roll your balance to your own IRA. This option is best if you don’t like the investment options in your new plan.
Regardless of which avenue you choose for your savings, be sure to keep beneficiaries in mind. As you age and your balance accumulates, it is important to get a professional opinion not only on the investment options but also on the beneficiary options.
Beneficiaries pay income taxes at their own rates. For example, if you leave funds to three children, each will pay taxes based on his/her own tax rate at withdrawal. It is important to consult with a professional related to the many variations associated with beneficiaries. Sometimes, things are not as direct as one might think.
Managing and protecting your savings can be complicated, so it’s important to ensure your assets are working as hard for you as you have to do to earn them.