tions--there's no up-front tax benefit but qualified distributions are entirely tax free.
Your employer may match all or part of your contribution up to a certain level. You typically become vested in these employer dollars through years of service with the company.
Your funds grow tax deferred in the plan. You don't pay taxes on investment earnings until you withdraw your money from the plan.
You'll pay income taxes and possibly an early withdrawal penalty if you with- draw your money from the plan.
You may be able to borrow a portion of your vested balance (up to $50,000) at a reasonable interest rate.
Your creditors cannot reach your plan funds to satisfy your debts. Contribute as much as possible
The more you can save for retirement, the better your chances of retiring comforta- bly. If you can, max out your contribution up to the legal limit. If you need to free up money to do that, try to cut certain expenses.
Why put your retirement dollars in your employer's plan instead of somewhere else? One reason is that your pretax contributions to your employer's plan lower your tax- able income for the year. This means you save money in taxes when you contribute to the plan--a big advantage if you're in a high tax bracket. For example, if you earn $100,000 a year and contribute $10,000 to a 401(k) plan, you'll pay income taxes on $90,000 instead of $100,000. (Roth contributions don't lower your current taxable in- come but qualified distributions of your contributions and earnings--that is, distribu- tions made after you satisfy a five-year holding period and reach age 59½, become disabled, or die--are tax free.)
Another reason is the power of tax-deferred growth. Your investment earnings com- pound year after year and aren't taxable as long as they remain in the plan. Over the long term, this gives you the opportunity to build an impressive sum in your em- ployer's plan. You should end up with a much larger balance than somebody who in- vests the same amount in taxable investments at the same rate of return.
May 2012
17 Kalon Women Magazine
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