Try to contribute the maximum you can

Published on Page 9 of the August 21, 2013 issue of Morgan Hill Life

By Dan Newquist

Dan Newquist

Dan Newquist

With company funded pensions near extinction, more Americans shoulder the responsibility of funding their own retirement. Many rely on their employer sponsored 401(k)s and similar defined contribution plans – 403(b), 457s – to meet their savings and investment goals.

A 401(k), offered by corporations, allows you to contribute a portion of your income to the plan on a pretax basis. Technically, you reduce your pay by the amount you wish to contribute to the plan and your employer deposits those funds into the plan each pay period. The 2013 annual contribution limit is $17,500 for those younger than 50 and $23,000 if you are older than 50.

There are two main reasons to participate in your company 401(k). First, you reduce your taxable income by the amount you contribute. Second, as long as the money stays in the plan any growth, gains or dividends remain tax free until you retire. As an added bonus, some plans offer an employer matching contribution, but you only get the match if you participate and contribute yourself. If your plan offers a match, do it — the match is free money.

How much should you contribute? Given the valuable tax breaks, it makes sense to invest the maximum if you can. If you can’t, try to contribute at least enough to qualify for your company’s maximum matching contribution. Your human resource department can help you determine how to get the greatest match. Just get started. Remember, you are funding your plan with pretax dollars. As an example, if you put $100 per pay check into your 401(k), your paycheck might only get smaller by $60 to $80. The exact amount will vary depending on salary and tax bracket.

If you start with small contributions, and increase them by 1 percent or so every year, you may hardly notice the difference in your pay check (especially if you time your contribution increases with raises or bonuses) and your tax bill will benefit. Choosing the right investments is important. Your plan offers a set menu of investment options. This typically includes equity mutual funds for growth, bond funds for income or money market investments for protection of principal. It could also include company stock. This allows you the flexibility to diversify your contributions among different types of investments and should be based on your appropriate investment objectives, risk tolerance and time line for retirement.

It’s up to you to make the investment decision, not your employer, so we recommended consulting your investment advisor to determine the best allocation. Your 401(k), or similar 403(b) & 457, plan is likely the cornerstone of your retirement and the foundation for your future financial security. It is in your best interest to consult with your financial advisor to determine how your employer’s plan could help make your financial future more secure.

This report is intended for educational purposes. It is not intended as advice. Consult your financial or tax-planning professional for guidance for your specific situation.

Dan Newquist, CFP®, AIF® is a Principal Investment Advisor Representative with RNP Advisory Services, Inc., in Morgan Hill and can be reached at 408-779-0699 or [email protected]. Investment advisory services offered through RNP Advisory Services, Inc. – a registered investment advisor. Securities offered through Foothill Securities, Inc., member FINRA/SIPC, an unaffiliated company.