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Jerry Citarella: The beneficial features of your company 401(k) plan

Financial Truth

Posted: August 9, 2011 1:55 a.m.
Updated: August 9, 2011 1:55 a.m.
 

Free money!

I thought that might get your attention. Where can you get free money? It might be closer than you think.

It’s readily available to millions of Americans but, amazingly, many just pass it up. Don’t be one of them. If you can’t avoid it, it’s time to make the changes necessary to get your fair share.

When discussing company-sponsored retirement plans, like the most well-known 401(k), it often amazes me that a surprisingly large number of people don’t take full advantage.

People pass up on money their company is willing to give them — via monetary contributions companies make to employee 401(k) plans.

I see this time after time, and even after explaining what’s being lost by not taking advantage of a company-sponsored 401(k) plan, many people still don’t take advantage of what’s being offered.

Many, if not most of these plans, offer a matching contribution from the employer. The company agrees to match the dollar contribution made by an employee by putting an equal amount of money into the employee’s retirement fund. Employer contributions often have a cap.

If an employee decides to participate by making contributions in his or her retirement plan, the company will also make contributions into the plan.

If the employee doesn’t contribute, then the company also won’t contribute.

It’s money waiting for you, with your name on it, if you’ll simply commit to doing something for yourself.

I’m often asked, “How much should I put into my company retirement plan?”

My answer is the same every time. I say, “At minimum, you should put in whatever the company will match.”

It’s very simple. If I said, “Place a dollar on the table, and I will also put one down for you,” how many dollars would you put down? Probably as many as you have in your pocket; then you’d ask if you could go get some more.

It sounds simple, but so many people don’t maximize what their company is willing to match.

If you are doing so, that’s great.

If not, please make the necessary arrangements or changes in your life that will allow you to do it. Remember, free money doesn’t come around very often.

Sometimes there’s a vesting or waiting period before you’ll receive the portion of your money the company contributes on your behalf.

I’ve heard people say they don’t care about the company’s contribution because they might not work at the company long enough to receive it.

I’ve also known of people who don’t get involved because they’re confused about how it works.

Both reasons are invalid. If you leave early, you still get the money you put in — which was tax-deferred and has other benefits — not to mention you’re actually saving money.

If you do stay long enough, usually a fairly short period of time, you’ll get all of what the company added plus potential growth.

If you don’t do it, you get nothing.

Regarding finances, misinformation and confusion are most commonly the reasons for making big mistakes. Sometimes I hear a very simple statement that makes no sense at all.

People will say “I’m not putting anything into my 401(k). Those things aren’t any good.”

What the heck does that mean? That statement really upsets me. How can something that gives you the opportunity to conveniently save for your future, in a tax-favored manner, with the opportunity to have additional funds given to you, be a bad thing? Misinformation.

I believe some people have had bad experiences with investments inside of the plan or might have had someone tell them about their own bad experience. Because of this, they believe it is a bad idea to put money into company sponsored plans.

What you need to know, if you don’t already, is that the 401(k) or other company-sponsored plan is not an investment in itself. It’s simply one type of account.

Within the 401(k) account, you’ll have many options for “investing” the money. Most will even include a fixed account that will act much like a bank savings account if you’re concerned about potential investment losses. Your job is to put as much money into the plan as possible.

If you have any confusion about how a company-sponsored retirement plan works, please seek out reliable and ethical guidance. It’s a great opportunity that should not be passed up. Please do not leave money on the table.

Jerry Citarella is the owner of Infinity Wealth Management www.InfinityGoals.com. 23734 Valencia Blvd., Suite 301, Valencia, (661) 255-9555, ext. 11. He is also the author of “The Truth Helps” series of financial planning books. Mr. Citarella’s column reflects his own views and not necessarily those of The Signal. Submit questions to: jcitarella@nextfinancial.com. Securities and investment advisory services offered through NEXT Financial Group, Inc. Member FINRA/SIPC. Infinity Wealth Management is not an affiliate of NEXT Financial Group Inc.

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