Not everyone retires with a golden nest egg, but
many of todays workers will find that by the time
they retire, their 401(k) plans will have become their largest
- Lorayne Fiorillo, author of
Financial Fitness in 45 Days
15 years ago, few people had ever heard of a 401(k) plan.
Today its a household word, like 409 spray or WD-40.
Employees have come to expect a good 401(k) plan when they
take a job, and employers know they must offer them to attract
the best workers.
With a 401(k) plan, an account is established for each participating
employee. The employee makes fixed contributions to the plan--generally
a percentage of each paycheck. The employer may match that
amount, with a dollar for dollar or $.50 per dollar contribution,
up to a certain percentage.
For example: You contribute 10% of your salary, which means
10% of each paycheck. Your employer matches each dollar up
to 3% of each paycheck. Say you make $35,000 per year, so
you contribute $3,500 a year, or approximately $135 per pay
period ($3,500 divided by 26 paychecks per year). Your employer
will match about $40 per pay period (3%). Altogether, the
total contribution to your account per month will be approximately
Other advantages of 401(k) plans include:
- In theory, you may contribute up to 15% of your salary
(many plans limit this number and each year the government
places a maximum cap on contributions).
- Various investment options to self-direct your retirement
- Tax deferral on gains until money is withdrawn.
- Professional money management.
- The ability to transfer the vested balance to a new employer
for continued growth.
- In many cases, the ability to borrow up to 50% of your
The downside to 401(k) plans is that--like all plans designed
for retirement savings--withdrawals made before age 59 ½
may be subject to a 10% federal tax penalty.